Westpac could soon find itself at the centre of a vexing geo-political controversy as the odds fade on its effort to sell its Pacific banking business to Papua New Guinea’s Kina Bank.
PNG’s competition regulator last month issued a preliminary decision against allowing the sale of Westpac’s PNG arm to Kina on grounds that it would substantially reduce competition in the retail banking market.
While Kina and Westpac are trying to persuade the regulator that the transaction would support competitive tension in PNG banking, the Australian major bank is facing a real prospect that the deal will be blocked.
If the Independent Consumer and Competition Commission scuttles the deal it would leave Westpac holding an 89 per cent stake in a bank that no longer meets its strategic appetite and with no alternative in-market buyer able to stump up more than A$300 million to acquire the business.
Currently, there are only four commercial banks licensed to operate in PNG – Westpac, Kina, ANZ and the Bank of the South Pacific Limited(BSL).
BSL is the dominant player, accounting for almost two thirds of the banking assets in the country.
For obvious reasons, it is precluded from acquiring Westpac PNG.
ANZ has no strategic interest after offloading most of its PNG operations to Kina Bank several years ago.
If the deal with Kina is scuttled by the ICCC, Westpac’s only options would be to seek interest from the PNG Government or an international bank to get a deal done.
Acquiring a bank would be complicated for the PNG Government given it holds a sub-investment grade sovereign rating of “B- with a negative outlook” from Standard & Poor’s.
There are no other international banks licensed to operate in PNG, although one of the world’s fastest-growing banking networks opened a representative office in Port Moresby last year: Bank of China.
Given the likelihood of the ICCC rejecting a sale to Kina, Westpac chairman John McFarlane and his board might already be considering the politically sensitive option of cutting a deal with the Bank of China or another Chinese bank.
Such a move would likely disappoint the Morrison Government, which has been keen to trumpet the importance of Australia’s commercial presence in the Pacific.
Depending on the geo-political climate in the next six months, it might also trigger a hostile response from Canberra towards Westpac that could lead to the type of public embarrassment the bank is desperate to avoid.
The stakes are high for Kina Bank. It stands to boost its market share materially if the deal proceeds.
It is now trying to persuade the ICCC that the acquisition will lead to more competition in PNG banking after announcing plans this week to embrace a multi-brand strategy that would see the Kina-owned Westpac operation be managed to compete against Kina Bank’s proprietary operation.
“We will expand the distribution footprint of banking services across PNG to reach more Papua New Guineans,” said Kina CEO, Greg Pawson in an ASX filing on Monday.
“We will retain the existing Westpac corporate structure, banking licence, operations and technology – and simply rebrand as East West