In an announcement this morning, Westpac Banking Corp (ASX: WBC) informed the market that it was selling its banks in Samoa, Tonga, the Cook Islands, the Solomon Islands, and Vanuatu to Bank of the South Pacific for $125 million.
The bank will refocus its Pacific Island operations on its primary markets in the region, Papua New Guinea and Fiji.
Chief Executive of Westpac Institutional Bank (parent division of Westpac Pacific), Rob Whitfield, is quoted as saying the sale reflects Westpac's decision to 'increase focus on our growth plans in the larger markets of PNG and Fiji, where we have a strong history'.
As readers might suspect, the decision has a lot more to do with sound financials than any sense of history, with Westpac wisely bailing out of markets with weaker potential for growth.
Although similar in natural resources and demographics, the five island markets being sold have significantly poorer growth prospects for banking when compared to Fiji and PNG thanks to a confluence of political, cultural and economic factors.
For starters, Papua New Guinea and Fiji have enjoyed significant foreign investment both of the commercial and aid varieties, which have had enormous knock-on effects for money services.
Oil Search Limited (ASX: OSH) has major, expanding LNG exploration and extraction operations in Papua, while a subsidiary of Coca-Cola Amatil Ltd (ASX: CCL), Pacific Beverages, runs a sizeable beverage manufacturing and brewing company in Fiji.
Fiji also receives massive financial aid from the Chinese government – which is reportedly seeking a friendly port for its navy in the Pacific – as well as Chinese tycoons who are chasing bauxite, timber, and other natural resources in the island nation.
The amount of money injected into the economy through individuals employed by these schemes in small nations cannot be overstated, and has major follow-through effects for housing demand, business and infrastructure growth, financial services, domestic investment, and the retail industry (among many others).
Westpac is very cleverly carving itself a niche as financier to all these growth industries, and has wisely exited other markets which haven't experienced the same level of foreign investment and thus don't offer the same level of opportunity.
The sale is not expected to have any materially adverse effects on Westpac's financials, and should finalise mid-2015, subject to the usual regulatory hurdles.
