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Why Westpac could get a $700m cash injection next week

Brendon Lau

Australia’s second largest bank could be close to announcing an asset sale that may inject $700 million into its balance sheet.

The Westpac Banking Corp (ASX: WBC) share price dipped 0.6% this morning to $26.28. This probably isn’t due to the news of the divestment though as shares in the other big banks are also trading in the red.

The Commonwealth Bank of Australia (ASX: CBA) share price lost 0.5% to $79.91, the National Australia Bank Ltd. (ASX: NAB) share price shed 0.7% to $27.13 and the Australia and New Zealand Banking Group (ASX: ANZ) share price slipped 0.2% to $25.25.

In contrast, the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index is trading just above breakeven at the time of writing.

Asset sale provides extra cash boost

Westpac is reported to be in late stage negotiations for the sale of its equipment and asset financing business, according to the Australian Financial Review.

The division held $2.9 billion in lease receivables and 62,000 corporate and business customers when Westpac acquired it from Lloyds Banking Group in 2013. Analysts estimate that this business is worth between $600 million and $700 million.

It is unclear at this stage who is in the box seat to buy the business from Westpac, but the AFR ruled out Macquarie Group Ltd (ASX: MQG) and Bank of Queensland Limited (ASX: BOQ) even though these financial institutions have similar businesses.

Instead, the potential buyer might be New York-based Cerberus Capital Management, which has US$42 billion ($62 billion) in assets globally, added the AFR.

Why banks are divesting assets

The sale would be welcomed news for Westpac shareholders. Big banks have been shedding assets to shore up their balance sheet, simplify their overly complex businesses and improve return on equity (ROE).

The ROE for all the big four banks is under pressure, particularly in the face of the Banking Royal Commission fallout and plummeting interest rates.

Regulatory pressure to tighten lending standards and increased the banks’ capital buffers are also hurting returns in the sector.

Foolish takeaway

Westpac completed a $2 billion placement to put worries about the strength of its balance sheet to rest. It is currently offering a share purchase plan (SPP) to existing shareholders that is priced at $25.32 a new share – the same as the placement to institutional investors.

The extra cash injection from the equipment and asset financing business will go a long way in giving investors comfort that it probably won’t need to undertake another fund raising exercise anytime soon.

This will give Westpac an edge over NAB as I think a capital raise cloud is hanging over the latter.

The post Why Westpac could get a $700m cash injection next week appeared first on Motley Fool Australia.

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Motley Fool contributor Brendon Lau owns shares of Australia & New Zealand Banking Group Limited, Commonwealth Bank of Australia, Macquarie Group Limited, and Westpac Banking. Connect with him on Twitter @brenlau.

The Motley Fool Australia owns shares of and has recommended Macquarie Group Limited. The Motley Fool Australia owns shares of National Australia Bank Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

The Motley Fool's purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, The Motley Fool's free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. 2019