Westpac NZ asset & liability transfer from Aussie parent, bringing it in line with RBNZ rules, cost NZ$4.2 bln

By Gareth Vaughan

Westpac New Zealand raised NZ$1.130 billion through the issue of 1.130 billion shares to its parent at NZ$1 each in late October to help fund the transfer of more than NZ$6 billion worth of assets and over NZ$5 billion of liabilities from its parent to bring the bank in line with Reserve Bank rules.

In its General Disclosure Statement (GDS) for the year to September, out yesterday, Westpac NZ says the share issue took place in two tranches, 900 million on October 28 and 230 million on October 31. It has also taken out a NZ$3.1 billion three-year loan from its Australian parent, Westpac Banking Corporation, priced at the New Zealand Bank Bill Reference Rate (BKBM), plus a margin reflecting market pricing on November 1, to help fund the asset and liability purchase.

Just before the second share issue, Westpac NZ paid its parent a NZ$230 million dividend.

The transfer programme was put in place after non-compliance by Westpac NZ with some bank registration conditions in 2008. This led to a review of Westpac's operating model in New Zealand in 2009 and ought to help prevent the situation where Westpac NZ was forced to take "corrective action" to address additional breaches of Reserve Bank registration conditions last year.

Westpac's GDS for the year to September 2010 noted breaches to its conditions of bank registration, which are the means by which the Reserve Bank applies prudential requirements to banks, in three areas stemming from services provided to Westpac NZ by its Australian parent. See more here.

Loans and deposits shifted

The November 1 transfer involved shifting about NZ$6.4 billion of assets, comprised largely of loans to corporate customers, and about NZ$5.3 billion of liabilities primarily consisting of deposits. For the year to September 30 these business activities provided net operating income of about NZ$166 million, up NZ$3 million year-on-year, and profit after income tax of about NZ$114 million, up from NZ$103 million, Westpac NZ says.  The transferred loans had annual impairment charges of just NZ$1 million and no write-offs.

The transfer also sees Westpac NZ take on about 85 full time staff.

Westpac NZ says that the transferred operations will lead to it incurring costs stemming from them that aren't reflected in the annual profit figure.  These include expenses associated with complying with the liquidity and capital requirements stemming from operating the businesses, plus interest expense from its parent's loan to help fund the acquisition.

"Accordingly, the bank estimates that, if the Bank had acquired these businesses on October 1, 2010 the increase in its profit after income tax expense would have been significantly less than NZ$114 million," Westpac NZ says. "The Bank will continue to incur these additional costs in future years."

Westpac Banking Corporation announced the completion of the transfer to the Australian Stock Exchange on November 1. Westpac NZ CEO George Frazis told interest.co.nz last year the transfer, whilst inefficient, would have no impact on Westpac customers.

The changes to Westpac's New Zealand operating model can be traced back at least as far as 2004. That was when Westpac, which had been operating in New Zealand solely as a branch of its Australian parent, agreed to incorporate in New Zealand. Westpac NZ was duly registered as a bank in November 2006, meeting the Reserve Bank's local incorporation policy that all systematically important banks operating in New Zealand be locally incorporated.

Since 2006 Westpac has run the dual registration operating model with Westpac NZ conducting its retail and business banking activities in New Zealand and the branch established to undertake its institutional and financial market activities.

This article was first published in our email for paid subscribers this morning. See here for more details and to subscribe.