The share price of Australia’s third largest bank Westpac Banking Corp [ASX:WBC] is down slightly today upon the sale of its Pacific business.
WBC shares enjoyed nice growth over the past month as confidence returned to equity markets with the promise of a COVID-19 vaccine within months.
At time of writing the WBC share price is down 0.32% to trade at $20.20 per share — roughly the halfway point to WBC’s price pre-COVID.
Becoming a ‘simpler’ bank
The sale of the WBC Pacific business entails the sale of Westpac Fiji and WBC’s 89.91% stake in Westpac Bank PNG Ltd.
Kina Securities Ltd [ASX:KSL] will purchase the Pacific businesses for up to $420 million.
WBC’s CEO, Jason Yetton, said the sale follows the Bank’s strategic decision to focus on consumer, business and institutional banking in Australia and New Zealand.
‘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.’
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The sale price is made up of $315 million payable at completion and $60 million to be paid six-monthly over the following 18 months for Westpac PNG.
The price also includes earn-out payments of up to $45 million, which are scheduled to occur annually over 24 months following completion, and are subject to the business performance of Westpac Fiji.
WBC expects an accounting loss on sale of approximately $230 million including a foreign currency translation reserve.
So, there may be no material financial gain on the immediate sale of the overseas business.
Rather, the new, simpler bank may be more agile and able to extract more return from its assets.
What will this mean for the Westpac share price?
In the previous financial year, Westpac Pacific generated cash earnings of approximately $11 million.
This comprised net operating income of $177 million, expenses of $105 million and impairment charges of $54 million.
WBC expects the sale of its Pacific business will add approximately three basis points to its Common Equity Tier 1 capital ratio.
What this means is that WBC expect their financial strength to improve from the sale.
For investors, it means they could expect a bump in dividends come earnings season, with the general rule of thumb being: a higher Tier 1 the more you can justify paying to shareholders.
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