Westpac Banking: Corp Sale of Australian life business adds to surplus capital

About the author:

Azib Khan
Author name:
By Azib Khan
Job title:
Senior Analyst
Date posted:
10 August 2021, 8:00 AM
Sectors Covered:
Banks

  • Westpac Banking Corp (ASX:WBC) has this morning announced that it has entered into an agreement to sell its Australian life insurance business.
  • The sale adds to WBC’s surplus CET1 capital position. As a result of the surplus CET1 capital position and large surplus franking credit balance relative to the other major banks, we view the capital management potential for WBC to be more exciting than the other major banks.

Agreement to sell life business to TAL

Westpac Banking Corp (ASX:WBC) has this morning announced it has agreed to sell its Australian life insurance business (Westpac Life Insurance Services Limited) to TAL Dai-ichi Life Australia Pty Limited and enter an exclusive 20-year strategic alliance for the provision of life insurance products to Westpac’s Australian customers.

The sale price of $900m represents a multiple of 0.96x FY20 embedded value. In addition, the transaction includes ongoing payments to WBC.

Completion of the transaction is subject to various regulatory approvals and is expected to occur in the second half of CY2022. For the purposes of our forecasts, we are assuming the transaction will complete by 30 September 2022.

Sale adds to surplus capital position

The total accounting loss on sale is ~$1.3bn post-tax. A post-tax loss of ~$0.3bn, reflecting predominantly transaction and separation costs, is expected to be realised in the Group’s FY21 results, while the balance of the loss will be recognised upon completion of the sale.

The transaction is expected to add ~12bps to WBC’s Level 2 CET1 ratio.

We are now forecasting surplus CET1 capital (above a CET1 of 11.0%) of $8.5bn at end-FY22F (previously $8.0bn). As a result of WBC’s surplus CET1 capital position and large surplus franking credit balance relative to the other major banks, we view the capital management potential for WBC as exciting. This point is detailed in our report titled Underlying ROTEs show where value lies.

The remaining business to be sold in the Specialist Businesses division is the Superannuation, Investments and Platform operations business (which includes the Panorama platform). The sale of this business will potentially further add to WBC’s surplus CET1 capital position.

Investment view and changes to forecasts

We have made no changes to our cash EPS forecasts.

We retain an Add recommendation.

Our target price, based on our DDM valuation, is unchanged at (login to view).

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Disclaimer: The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.

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