Westpac's NZ move
Westpac’s announcement that it is reviewing its New Zealand business came as a surprise to the market but already has some investors salivating in the hopes the bank will undertake an initial public offer and list the NZ arm on the NZX.
The local share market is devoid of major financial institutions and many fund managers have opined in the past how they would love to see the local arms of the big four Australian banks listing here.
On Wednesday Westpac said it was assessing the appropriate structure for its New Zealand business and whether a demerger would be in the best interests of shareholders.
In the case of a demerger the NZ arm would be split into a separate business and existing Westpac Corporation shareholders would be issued with shares in the demerged business.
If the demerged business was listed on the ASX it would have the advantage of allowing Australian shareholders to keep their franking credits but it may not solve the problem that all that banks have – the need for more capital to satisfy new capital requirements due to come in next year.
In an IPO process shares are sold to new investors raising new capital. The other option is just to sell the New Zealand business to the highest bidder but this could face regulatory hurdles given the Reserve Bank would have to sign off of any buyer.
William Curtayne, portfolio manager at Milford Asset Management based in Sydney, says it could go either way or there may be no change at all.
“Just because there is a review doesn’t mean they will end up doing something. Previous rumours for any bank have never been confirmed by the bank in terms of a release saying we are investigating this option. The fact they have come out and said it means there is more to this than the rumours we have had over previous years with other banks.”
Curtayne said a demerged New Zealand arm could be listed on the ASX or have a dual-listing.
“The main reason to do spin-off is get those franking credits. One of the reasons to sell – would be to return profits to shareholders. Selling it outright as an IPO in New Zealand would have some merit in that, you would find quite a lot of demand in a market like this – term deposit rates are low and people are looking for options for their money even more so.”
Sam Stubbs, a former investment banker who founded KiwiSaver provider Simplicity, thinks the most likely scenario will be a partial listing of the Westpac NZ business on the NZX.
That would allow parent company Westpac Corporation to raise capital but also keep control by maintaining a majority shareholding. And Stubbs believes the other major banks could follow suit.
“It means you are likely to see several banks, maybe all of them, proceed with a sell-down. I can’t see why the others wouldn’t follow suit.”
“It would be a huge gift to the New Zealand market.”
The move would allow Westpac to keep its brand in New Zealand, raise capital but also keep control. He said the New Zealand arm was highly profitable and he likened it to the golden egg which meant the bank would not want to lose that.
He said it was logical for the bank to raise capital via the NZX. A partial listing was likely to get the seal of approval from regulators versus the sale of the arm to another overseas bank.
Stubbs said Westpac could probably get more money from selling the NZ arm through a trade or private equity sale but it would affect its Australian business as the two economies were closely intertwined and many businesses were trans-Tasman.
“Expect several other big banks to do it. I would be very surprised if Westpac do it alone.”
History shows the major four Australian banks tend to follow each other selling off their life insurance businesses and offshore investments in recent years.
Stubbs said Westpac was likely going now to get the first-mover advantage.
But Curtayne believes the other banks will wait and see what happens with Westpac.
“If that works well then they can consider it.”
Macquarie has been hired to help assist the process. If it does go down the IPO track that could see a listing by the end of the year while a demerger could happen sooner.
Housing out, shares in?
The Government’s housing announcements this week has investment houses eyeing a potential increase in people ditching out of property and buying into shares and fixed interest investments.
John Carran, investment strategist and economist at Jarden, said for many people housing would still be an attractive investment for them.
“People have a strong attachment to housing. They see it as a safe investment. Depending on their circumstances and where their investment property is and how much debt they have got – it is still going to be attractive to many people – you are not going to see a flood of people dumping their properties. But it is at the margin we will see the changes.
“I think for some people they will readjust their portfolios and if they have got multiple investment properties they may downweight those properties or if thinking about getting into market may think twice.
“The beneficiaries of that are likely to be the main alternative investments – if they are looking for a place to put their savings that is things like fixed interest securities or equities.”
Carran says that could see the local sharemarket benefit with a bump up.
“It is a net positive. It is difficult to say how much of a bump that would be and the magnitude of the flows may be overwhelmed by other things. Certainly. Another area that may benefit share markets indirectly is people may choose to put more money into their KiwiSaver. That’s the other vehicle that people could look at potentially.”
But he says one unintended consequence if people don’t see housing as attractive any more is they may look to riskier investments – they may be enticed by higher returns on riskier forms of debt securities or put their money into bitcoin.
Retirement village hit
One area that faces a negative impact from the housing announcements is the retirement village sector.
Carran says those stocks already took a hit on Tuesday.
“That has been priced into the market to a degree and some of the uncertainty there as well. That may already be priced in.”
Forsyth Barr analysts say the housing announcements are likely to affect the retirement sector stocks in three ways.
“Firstly, expectations with regards to long-term residential house price inflation is likely to moderate. Secondly and related, significant uncertainty with regards to near-term house prices may result in increased lead times for selling residential homes, and by
implications lead times to settle on acquired aged-care units.
“Finally, looking at fundamentals, versus a counterfactual of no tax change there is likely to be more modest price increases put through by the aged care operators in the near term.”
They estimate that a 1 per cent change in unit price growth will impact the sector annuity earnings by around 1 per cent.
Small win for Fletcher
On the flipside, they estimate Fletcher Building could see a small boost to its earnings through higher demand for new-build houses.
New-build investors will still be allowed to deduct mortgage interest against their income.
Investors bought 42,500 homes in 2020, up 17 per cent on the year before, which compared to total residential consents of 39,900 which was up 6 per cent over the same period.
“In addition, the NZ$3.8bn of infrastructure funding is aimed at bringing forward private and Government-led developments. As such, notwithstanding any greater than expected impact on house prices, we believe new residential construction will likely be sustained at current high levels.
“Historically, interest rates, housing turnover, and migration have been drivers of residential housing demand. Interest rates are likely to remain low near-term and
anecdotes suggest migration will lift materially once borders reopen.”
The estimate a 1 per cent change in residential consents impacts Fletcher Building’s earnings before interest and tax by around 0.4 per cent. .
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