Book-build clouded by bank's buyback

By Richard Braddell

Between the lines

It is no surprise retail investors are set to take the lion's share of Westpac Banking Corp's $800 million New Zealand share issue.

Several factors are driving demand: Australian bank stocks are cheap, around 30 per cent off their year highs; the New Zealand class shares are paid in two instalments resulting in an enhanced yield; and the investment's hybrid structure enables an investment linked to the Australian company's performance to carry New Zealand imputation credits.

But the next test for Westpac's New Zealand share issue lies in the institutional book-building process that finishes tomorrow. In that, bids from institutional investors, both locally and globally, will determine the final issue price.

With more than $500 million of the issue to be taken by the so-called mums and dads, it is hard to imagine that institutions won't take the balance. But it is questionable whether they will embrace it so eagerly.

Axa New Zealand's chief investment officer, Barry Lindsay, is one who has yet to make up his mind. While he regards Westpac as well-managed and with good prospects and strategy, he and other local institutional investors have little reason to buy the new local hybrid stock. They probably have all the parent company shares they want and they don't attach a high priority to switching shares to get the imputation credits.

And if queasy world markets are not enough, the firming trend in interest rates is creating an environment in which banks traditionally underperform. That explains why Australian bank stocks, which traditionally sit on price-earnings multiples about 70 per cent of the market average, are now mostly at 50 per cent or, in Westpac's case, a lowly 11-times earnings.

For all that, the fact that Westpac is buying back shares worth about $A500 million in Australia while issuing $800 million of shares in New Zealand raises questions of propriety. There is logic to Westpac re-jigging its capital since the kiwi issue will be more tax efficient for New Zealand shareholders thanks to the imputation credits. But the buyback could support the share price during the book-building for the new issue.

One-third of the way through the buyback which began at the start of August, Westpac has acquired 11 per cent of its shares. But this week it has been out of the market and - with the exception of the stronger performing Commonwealth Bank - its price has drifted in line with the rest of the market.

Given that the buyback appears to have had minimal impact on Westpac's price, the arguments come down to a what-if question: how would its shares have performed without the buyback? That's a good question for regulatory authorities on both sides of the Tasman but so far they show no interest in taking it up.