* Reduction to boost CET1 ratio by 18 bps - Westpac

* WBC shares fall 1.3%, benchmark index down 1%

July 19 (Reuters) - Australia's prudential regulator halved on Friday the A$1 billion ($670.50 million) operational risk capital add-on it had imposed on Westpac in 2019 after identifying problems in the bank's risk governance self-assessment.

The reduction will boost Westpac's common equity tier 1 (CET1) capital ratio by 18 basis points, the country's third-largest lender said in a statement.

"The remaining A$500 million capital add-on will remain in place until Westpac completes its transition work," the Australian Prudential Regulation Authority said in a statement.

Westpac said two separate operational risk capital overlays of A$500 million each imposed in 2019 resulted in a 36 basis point reduction in the Level 2 CET1 capital ratio as of March 31, 2024.

"The more capital at work could substantially boost Westpac's return on equity as the bank expands its loan book and the expected profit," said Glenn Yin, head of research and analysis at AETOS Capital Group.

The regulator had asked Westpac, ANZ Group and National Australia Bank in July 2019 to set aside A$500 million each until they strengthen their risk management and reimburse customers for wrongly charged fees.

The regulator then imposed an additional A$500 million capital requirement on Westpac in December 2019 to account for the bank's increased operational risk profile, mainly stemming from concerns about risk governance.

In mid-March, the regulator removed the A$500 million capital add-on requirement it had imposed on NAB.

Westpac shares fell 1.3% by 0032 GMT on Friday, while the benchmark stock index was 1% lower.

($1 = 1.4914 Australian dollars) (Reporting by Roshan Thomas in Bengaluru; Editing by Alan Barona and Subhranshu Sahu)