Money: Unwrapping the Westpac float glitz

By Philip Macalister

Banks: aren't they frustrating? First we grizzle about them because they relentlessly push up fees for no tangible increase in service. Then they come along with share offers which look too good to refuse.

Talk about contrary.

On Monday WestpacTrust unveiled its plans for its $800 million New Zealand share offer, which looks highly attractive because of its enhanced 17 per cent yield and access to imputation credits. A day later ANZ followed suit and flagged its intention to do a similar thing early next year.

The Westpac offer has impact. It's one of the biggest capital raisings in New Zealand's history, WestpacTrust is the biggest bank in the country and the organisers are going to make sure you don't forget it over the next four weeks while the offer is open.

At the big picture level, commentators are generally pretty thrilled by the offer, and the subsequent ANZ announcement.

"It's one of the best things which has happened to our sharemarket since I've been in the industry," Craig & Co sharebroker Brent Sheather says.

Mr Sheather says WestpacTrust and ANZ will add some much needed depth to the top end of the sharemarket which is currently heavily weighted to telecommunications (Telecom) and cyclical forestry stocks (Fletchers and Carter Holt Harvey). While Telecom has been an uplifting asset for the market (in fact it has been the top 10's lifebuoy), the forestry stocks have been anchors, firmly securing the index in one spot. Their impact has been accentuated by the likes of Brierley Investments.

Mr Sheather says stocks like WestpacTrust are reliable companies with good management in the all-important financial services sector. The banks add further depth to the financial sector which now also includes AMP, Colonial, National Mutual and, later this year, Tower.

Mr Sheather says another positive factor out of these offerings is that they give investors exposure to the broader New Zealand economy.

The other plus for the broader market is that a big brand name bank stock may help bring more of the Mum and Dad investors back into the sharemarket, and hopefully they will have a rewarding experience which will entice them to buy other shares.

While the broad fundamentals of the offer are attractive, the big drawcard is the souped-up yield WestpacTrust is offering. Under an instalment receipt structure, which has been favoured by many offerors in recent years, investors make a downpayment on a share and pay the balance at a specified future date. With WestpacTrust investors make a first payment of $7.20 per share on October 5 (250 shares or $1800 minimum), and pay the balance on December 20, 2000.

The final price is unknown at this stage and will be determined after the institutional "book building" process which is likely to be completed on October 9. The final price will be similar to the head share price (currently around $A9.70).

During the 14-month period between the two payments, shareholders can expect to be paid three dividends which, assuming Westpac's current dividend is maintained, will yield 17.2 per cent before tax, or 14.2 per cent on an annualised basis.

When placed against bank bills and fixed interest type investments, this is a hugely attractive offer.

Banks aren't renowned for giving away money so there has to be a reason for such an apparently generous yield.

Armstrong Jones chief investment officer David McClatchy says there are two main points behind the high yield. First, there is plenty of evidence to suggest that New Zealanders are besotted with yields and don't pay much attention to the risk/reward equation - so it's a good way to "get the offer away".

That brings up the second point. The high yield recognises the extra risk investors are taking on with this offer. While WestpacTrust may be like an All Black front row forward - big, sound and solid - there's also risk (like the prop at the bottom of a South African ruck).

Mr McClatchy says investors need to understand that this investment, which could be described as a bond wrapped up as an equity offer, is actually a share offer and it has capital risk.

With a fixed interest investment, such as a Government bond, investors are paid a yield and know they will get their capital back. With a share investment there is far less certainty that the capital will be repaid.

He says that because this is an instalment receipts any share price movement has an amplified impact on the investment's capital value.

Mr McClatchy doesn't believe the yield is too generous for the risks involved.

"You don't get something for nothing."

Investors going into the WestpacTrust float are buying the WestpacTrust brand, but they are not buying the bank. What they are doing is paying money into a New Zealand company which then on-lends the funds to Westpac Banking Corporation in Australia. That money will then be used to lower the bank's cost of capital to help improve its performance. Many commentators see this as a positive step in the group's development.

WestpacTrust Investments shareholders will have no direct ownership of the bank, and their shares can only be swapped for ordinary shares in certain circumstances such as a takeover or liquidation.

Despite not having any ownership in the bank, the shares are expected to track the ordinary shares reasonably closely. Factors which may create a differential between the two include, market conditions differing between Australia and New Zealand, exchange rate fluctuations, differences in liquidity of the two shares and differences such as the value of imputation credits in New Zealand.

Besides the yield, the offer is attractive to New Zealand investors as the shares will pay the New Zealand dollar equivalent of the dividend paid on the ordinary shares listed in Australia. The WestpacTrust Investments shares will also include imputation credits where these are available.

This feature highlights, and overcomes, one of the major issues facing New Zealand investors in the Australian market. Differences in the tax structures mean that New Zealanders buying, say, ordinary Westpac shares are double taxed on their dividend streams.

Predictions are that, although WestpacTrust is a big offering, it will be keenly sought. Mr McClatchy says it will be sought by retail buyers, index funds (it will be ranked about number 15 on the NZ Stock Exchange) and international institutions seeking high yielding stocks.

This demand, coupled with the enhanced yield of the first 14 months, may see the shares trading at a premium, Mr McClatchy says.

Spicers Portfolio Management director George Kerr likes the stock and the banking sector. He says the bank has the ability to leverage off its customer base of 7 million people and grow its profits beyond the $A1.3 million it made in 1998.

He is less certain the stock will trade at a premium.

Mr McClatchy worries about private investors chasing yields and not fully understanding the risk characteristics of shares. Consequently, these people will chase this stock and, if there is unsatisfied demand, will quite possibly push the price up after listing.

So while bank fees may annoy you, this is your chance to get something back from the organisation.

"Now they are great guys," Mr Sheather says. "May the fees keep going up!"

* Philip Macalister is the editor of online money management magazine Good Returns www.goodreturns.co.nz. Good Returns provides news on managed funds, mortgages and financial planning.