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Is the Westpac (ASX:WBC) NZ demerger good news for its share price?

The Westpac Banking Corp (ASX:WBC) share price has come under pressure this week. Is this a buying opportunity for investors?
The post Is the Westpac (ASX:WBC) NZ demerger good news for its share price? appeared first on The Motley Fool Australia. –

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The Westpac Banking Corp (ASX: WBC) share price has come under pressure this week following a couple of announcements.

The banking giant’s shares have continued their decline on Thursday and are currently down 0.5% to $24.05.

What did Westpac announce?

Earlier this week Westpac announced that the Reserve Bank of New Zealand (RBNZ) has instructed its Westpac New Zealand business to commission two independent reports concerning its risk governance and liquidity risk management.

It also told Westpac that its New Zealand business would have to hold additional liquid assets until the central bank is satisfied that the previously required remediation work has been effective.

Not long after revealing this news, Westpac released a second announcement revealing that it was now reviewing its New Zealand business and assessing whether a demerger would be in the best interests of shareholders.

Is the demerger a good idea?

This morning analysts at Goldman Sachs advised that they have been looking over the implications of a demerger.

The broker believes there are three key points for consideration in assessing this plan. They are as follows:

1: Growth and returns profile of the New Zealand business:

“We note that in FY20, the New Zealand division of WBC earned an ROE of 8.9% (ex-notables), compared to the broader WBC group (ex-NZ) of 3.2%. In both cases, if we adjust the FY20 BDD/total loans charge for a more normalised level (i.e. c. 20 bp), we note the NZ ROE (ex-notables) was 10.5% and the WBC group (ex-NZ) was 9.4%. However, clearly the RBNZ’s objective of increasing the level of capital in the New Zealand banking system will adversely impact the relative NZ ROE trajectory going forward. To this end, we previously estimated that the FY19 NZ major bank ROE of 14% would fall by 5% to 9% assuming the NZ$20 bn required increase in Tier 1 capital was entirely funded by equity.”

2: Risk of dis-synergies in case of a demerger:

“We think this risk is ameliorated by the fact that the RBNZ has been progressively structurally separating the operations of the New Zealand business from the Australian parents, from the perspective of funding, capital, and, more recently, broader operations, including systems.”

3: Risk of credit rating downgrade for New Zealand business in case of a demerger:

“In the past, we have seen situations where a parent announcing a potential demerger led to credit rating agencies deciding to downgrade the credit rating of the demerged subsidiary. According to the company, WBC’s New Zealand entity gets a three notch rating upgrade from Standard and Poor’s (and one notch from Moody’s and Fitch) due to the ownership by the Australian parent.”

Is the Westpac share price in the buy zone?

After weighing the pros and cons of the demerger plan, Goldman Sachs remains positive on Westpac and has retained its buy rating and $25.94 price target.

Based on the current Westpac share price, this implies potential upside of almost 8% excluding dividends. Including them, this stretches to approximately 12.5%.

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Motley Fool contributor James Mickleboro owns shares of Westpac Banking. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

The post Is the Westpac (ASX:WBC) NZ demerger good news for its share price? appeared first on The Motley Fool Australia.

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