Institutional investors say Westpac's decision not to demerge its New Zealand business, is a blow to the local sharemarket

The Australian bank has decided to keep the New Zealand arm after a review showed the demerger wouldn't be in the best interest of its shareholders.

Devon Funds Management's portfolio manager Tama Willis says they would have fully supported Westpac coming to the local market.

He says it would have been about eight per cent of the New Zealand sharemarket, and would have added a new investment opportunity for New Zealand based funds.