The Australian banking giant confirmed its decision to keep the NZ banking business on Thursday morning.
Peter King, chief executive of Westpac Group, said: "After a detailed review, we believe a demerger of the WNZL business would not be in the best interests of shareholders.
"Our review identified opportunities to improve service for customers and value across the WNZL business and we will progress these with the WNZL board and management team.
"WNZL is a strong business that has been serving New Zealand for 160 years. We remain committed to delivering for customers and fulfilling our purpose of helping Australians and New Zealanders succeed."
The proposal to sell or spin-off the NZ business was put on the table as a response to the Reserve Bank's new capital requirements, which will force the big four NZ banks to hold more capital aside.
Following its decision to keep its Kiwi division, Westpac said it would prioritise the appointment of a new NZ chief executive to replace David McLean, who retires on June 25.
Westpac New Zealand's GM of institutional and business banking, Simon Power, will become acting CEO following McLean's departure.