Westpac Between APRA And A Hard Place

Australia | Dec 09 2020

Westpac has divested of several non-core operations yet as the banking regulator puts pressure on governance measures, costs will undoubtedly rise

-CET1 ratio improves with sales
-Yet new governance issues emerge
-Expenditure on compliance squeezes investment

 

By Eva Brocklehurst

As the banking regulator is kept at bay and the knotty issue of offloading non-core businesses continues to reverberate, Westpac Banking Corp ((WBC)) has confronted the complex task.

Simplification presents challenges to the operating outlook, as the bank has to balance regulatory risks while improving the performance of several segments. To this end, Westpac will divest its general insurance business to Allianz for $725m. This will boost the CET1 ratio by a handy 12 basis points.

The bank will also divest its Pacific businesses to Kina Securities ((KSL)) for up to $420m, increasing the ratio by a further three basis points and taking the proforma CET1 ratio to 11.4%.

Macquarie considers the discount in the stock incorporates the challenges and there is relative valuation upside compared with peers. That said, market share losses need to be arrested and productivity benefits delivered to close the valuation gap.

Morgan Stanley notes the Pacific businesses generated pre-provision profit of $72m in FY20 and while the transaction is small, it is a further step towards simplification. The sale involves the 89.91% interest in Westpac Bank PNG and branch operations in Fiji.

There remains automotive finance, margin lending & equities broking, Australian life insurance, superannuation & retirement products and wealth administration in the bank's specialist division.

The sales of general insurance and the Pacific business come as Westpac agrees to a court-enforceable undertaking with the regulator, the Australian Prudential Regulatory Authority (APRA), to make more effort to address deficiencies in governance.

APRA has made its concerns known about the tardy nature of the bank's progress in improving its practices. New issues have emerged including breaches of liquidity standards while long-standing weaknesses have been allowed to fester.

Greater accountability is required by the enforceable undertaking and Westpac will need to obtain independent oversight of its risk management plan for direct reporting to APRA within 15 days of the end of each quarter.

Cost

Yes, there is a cost. Ord Minnett notes, with APRA linking the $1bn capital add-on to the undertaking, other banks will experience a normalising of capital in a more timely fashion.


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