A significant decline in Westpac’s business in the September half of its 2020/21 financial year, including sharply higher costs and a plunging margin, prompted intense questioning from analysts at the bank’s results briefing yesterday about its ability to meet cost targets, manage its margin and grow its banking franchise.
Westpac reported net profit of A$5.4 billion for the 12 months to September – an increase of 138 per cent over the previous year. Cash profit of $5.3 billion was up 105 per cent.
However, second half profit was 41 per cent below the first half, net operating income fell 1 per cent, operating expenses jumped 22 per cent and the net interest margin fell 10 basis points.
Some of the drop in the second half was due to notable items, including a write-down of institutional bank and businesses for sale assets, remediation and litigation costs. Excluding notable items, cash profit was down 18 per cent half-on-half.
Westpac chief executive Peter King said the bank has been determined to recover momentum in the mortgage market, where it has lost share in recent years, and set its rates in line with market pricing.
The Australia housing loan portfolio grew 3 per cent to $455 billion over the year and the New Zealand housing loan portfolio grew 10 per cent to $60.8 billion.
Lower rates, plus an increase in the proportion of fixed rate mortgage lending, had the biggest impact on margins.
King said the bank would continue to meet the market on price. “The book was contacting. Over time we need to grow the franchise and develop the whole customer relationship. We have to grow revenue over time.”
To get its margin back up, the bank is looking to do more business lending and unsecured personal lending. The business lending book grew just 1 per cent in Australia over the year and fell 3 per cent in New Zealand. The personal loan book was down 14 per cent in Australia and down 18 per cent in New Zealand.
King said business loan growth was low because the bank tightened its credit standards as a COVID measure. That position has now been reversed. He said the bank has worked on its business banking processes so that bankers can spend more time with customers.
The bank’s operating expenses rose 4 per cent to $13.3 billion over the year. Second half expenses of $7.3 billion were 22 per cent above the March half and the cost-to-income ratio shot up to 69.4 per cent.
The bank said the increase was due mainly to higher workforce expenses. There were also cost related to selling businesses and further provisions for remediation costs and litigation expenses.
King has given a commitment to get the bank’s annual cost base down to $8 billion by 2024. Of the $13.3 billion of expenses in 2020/21, $2.3 billion was notable items, $800 million related to specialist businesses and $1.1 billion was related to its program of activities to strengthen risk governance, accountability and culture – leaving a cost base of $9.1 billion.
The cost reduction is to be achieved by simplifying the business and the product portfolio and by reducing notable items.
Westpac’s share price fell 6.7 per cent to $23.96 yesterday, reflecting investors’ concerns about the direction of the business.