Westpac Banking Corp (ASX: WBC) has announced the sale of its pacific businesses to Kina Securities Ltd (ASX: KSL).
Westpac Pacific includes commercial banks in both Fiji and PNG as well as services to retail, business and institutional banking customers. At 30 September 2020, it had net assets of $580 million, net loans of $1.58 billion, deposits of $2.34 billion and risk weighted assets of $2.9 billion. Westpac owns just under 90% of Westpac Bank PNG.
In FY20 it generated cash earnings of approximately $11 million, which comprised $177 million of operating income, expenses of $105 million and impairment charges of $54 million.
Why did Westpac decide to sell this business?
The major ASX bank explained that Westpac is focusing on consumers, businesses and institutional banking in Australia and New Zealand.
The sale price is $315 million payable at completion and $60 million to be paid in six-monthly instalments over the following 18 months for Westpac PNG. The sale price also includes earn-out payments of up to $45 million which are subject to the business performance of Westpac Fiji.
Westpac is expecting to recognise an accounting loss of approximately $230 million on this sale.
Jason Yetton, the Westpac executive repsonsible for specialist businesses and group strategy, said: “We are taking another step in becoming a simpler, stronger bank while ensuring a high standard of banking services is maintained for our Pacific customers, as well as providing new opportunities for our people.
“Choosing the right purchaser for our businesses is important to us, our people and the communities we serve. We are pleased our Pacific businesses are being acquired Kina Bank. Kina is a strong brand in the region and is well positioned with deep local knowledge to continue to help our consumer and business customers succeed.”
Summary thoughts
For Kina, this is a transformative deal. It will restore its profit/earnings per share (EPS) back above where it was from before the capital raising, before synergies.
It will increase Kina’s customers by 416%, net loans will rise by 275.6%, deposits will grow by 218%, the number of branches will increase by 182.3% and the number of ATMs will rise by 176.3%.
The sale will add approximately 3 basis points to Westpac’s common equity tier 1 (CET1) capital ratio.
However, a slightly better balance sheet doesn’t make Westpac more attractive in my opinion. It’s losing a source of earnings (and potential growth), whilst focusing on an increasingly-competitive loan market in Australia.
There are other ASX dividend shares I’d rather buy such as Brickworks Limited (ASX: BKW).
