Westpac has sold its stake in Zip for $367 million, one day after announcing a partnership with rival Afterpay

Zip Co co-founders Peter Gray and Larry Diamond (SMH, Dominic Lorrimer)

Australia’s second-largest bank appears to have switched sides in the red hot buy now, pay later sector.

Westpac has sold its long-held 10.7% stake in Zip, revealing the decision to offload 55.2 million shares in a statement to the ASX.

It stated the sale reflects a desire to simplify its business and ensure “the efficient use of capital”, selling the equity at a discounted rate of $6.60 per share.

“Larry Diamond, Peter Gray and the management team of Zip have done a tremendous job growing the company, including expanding globally. We look forward to seeing them continue to grow a global customer franchise,” Westpac chief information officer Gary Thursby said.

“We are continuing to explore opportunities with Zip, including working to integrate their buy now pay later functionality into our mobile banking apps across Westpac and our regional bank brands. This would expand our offering to customers and broaden the customers Zip can reach.”

However, the big bank will do so without a direct stake in the business, scoring $367 million for its trouble. Westpac acquired the shares back in 2017, for a measly $40 million, plus an $8.9 million top-up in 2019. In other words, the investment produced a $318 million – or 650% – profit. Not a bad employment of capital right there.

Since then the company has been on a tear along with much of the sector, with many companies having tripled their share prices or better.

None have performed better for shareholders, however, than Afterpay, which touched $8 a share back in March and briefly broke $100 this week.

The latest surge higher was indeed off the back of the news that Westpac had partnered with Afterpay to provide users direct access to savings and transactions accounts. It was a move that Westpac put down to deepening relationships with younger Australians as they turn their back on the credit cards offered by the big four.

Afterpay meanwhile said the strategy would empower consumers better manage their money, amidst a long-running push for the sector to be properly regulated.

While Westpac maintains it will continue to work with Zip on “mutually beneficial” opportunities, it looks like it may now be backing a different horse.