Westpac Secures Stake Sale in Pendal Group

Summary

• Westpac has sold its residual 9.5% stake in Pendal Group through a fully underwritten placement at $5.98 per share.
• WBC is likely to withdraw some of its funds that are managed by Pendal, and additional clarity would be given once the strategic review is completed by the group.
• Pendal, which continues to have a strong balance sheet with diversified revenues, is working on a number of transitions from Westpac.

Westpac Banking Corporation (ASX:WBC) has decided to sell its 9.5% stake in Pendal Group Limited (ASX:PDL) and arranged a fully underwritten placement for around 31 million shares in PDL. The institutional offer was successfully completed by the bank today. In 2017, the bank sold some of its stake in Pendal Group and indicated additional stake sale at a future date.

After selling its stake in Pendal in 2007, 2015 and 2017, the placement would mark completion of divestment in Pendal Group by the bank with offer settlement due to occur on 22 June 2020. WBC has offloaded the stake at a price of $5.98 per share, meaning a discount of 4% to the close of 17 June 2020.

Management believes that it was an appropriate time to exit from the Pendal shareholder book because Westpac is simplifying its business and intends to emphasise on core banking operations in Australia and New Zealand.

The transaction is expected to add approximately two basis points to the Common Equity Tier 1 capital ratio of Westpac, which will record a $32 million after-tax accounting gain in the second half of 2020, and the gain will be excluded from cash earnings of the group.

Westpac funds managed under PDL management

As Pendal and Westpac have a business relationship, PDL also manages some funds of Westpac’s superannuation business. In April 2019, Westpac withdrew around $1.5 billion of assets that were managed by Pendal due to the consolidation of superannuation products.

Westpac also withdrew ~$1 billion in funds under management (FUM) in February 2020. The bank expects to withdraw additional funds in two tranches, of which approximately $1 billion would be taken in this calendar year, and $0.8 billion would be taken out in the calendar year 2021.

BT Wealth Review

Westpac is conducting a strategic review, and it would be reporting a range of businesses under the Specialist Businesses division. The review also consists of BT Wealth, including its superannuation, investments, and platforms.

After completion of the review, Pendal may not manage all funds on behalf of Westpac Group. However, the bank is currently uncertain about the funds managed by Pendal on its behalf, as the strategic review is underway. As at 31 March 2020, Pendal was managing ~$14 billion for Westpac Group, excluding the funds subject to withdrawals and BT platforms.

WBC Litigation Update

Earlier in June, the bank filed its defence in relation to the ongoing proceedings by AUSTRAC and admitted to a substantial majority of contraventions alleged by AUSTRAC. WBC has continued to refine its processes and has reported its obligation to file transaction threshold to AUSTRAC.

Westpac has also reported additional SMRs for potential child exploitation, consistent with its remediation process announced in December last year. AUSTRAC is now investigating into the new matters brought by Westpac, and may amend the statement of claim, which would include new allegations revealed under the investigation.

The regulator has asked for further information on the new matters, including TTR issues and 272 customers, of which most were related to SMR that was filed as part of the remedial process/lookback. Additional updates would be provided by Westpac.

Pendal Group Acknowledges Sell Down

The stake sale by Westpac ends an era of ownership in Pendal by Westpac. Pendal has consistently improved on the strong foundations since it was listed as BT Investment Management in 2007. At the time of IPO, the group had $41.9 billion in funds under management sourced from Australian clients and a majority on behalf of Westpac.

Presently, Pendal Group is a diversified business with reach across geographies, clients, asset classes, and currencies. It has more than doubled the funds under management compared to the IPO and has transitioned into a global business with a majority of revenues deriving from international operations.

PDL is a cash flow positive business with no debt and a strong balance sheet. Pendal’s operational resilience, financial strength and a strong business model continue to position the business for a better future.

The company continues to have a strong relationship with Westpac. Presently, it is managing $15.4 billion for Westpac, which makes 18% of its total funds under management and less than 10% of the total revenue, according to a PDL announcement dated 18 June 2020.

It is working on a number of transitions from Westpac that are expected to complete over the coming two years. For the strategic review of Westpac wealth business, Pendal, as an active manager, continues to focus on delivering the best outcomes for its clients as well as Westpac.

On 18 June 2020 (AEST 03:06 PM), WBC was trading at $18.105, down by 0.248% from the previous close, while PDL was trading downward by 1.766% to $6.120.

(Please note that currency mentioned is in AUD, unless otherwise specified)