The costs of disorder at Westpac

Ian Rogers

Overworked and constrained by a rigid cost target, Westpac is standing by its strategic priorities, having reported the least impressive result of any of its peers this bank reporting season.

With a return on equity of 9.3 per cent and a return on assets of 0.7 per cent Westpac is the sector laggard, while also trailing on balance sheet metrics.

Languid loan growth and a material loss of mortgage market share are a drag on the turnaround story that Westpac is seeking to sell to the capital market.

Westpac chief executive Peter King yesterday said the bank had made steady progress in the first half of 2022, and was delivering on its goals of fixing and simplifying the group.

“The multi-year Customer Outcomes and Risk Excellence program is delivering to plan and we resolved a number of significant regulatory matters,” King said. 

“Our portfolio simplification saw two more businesses exited, with our focus now on the exit of the BT businesses,” he said.

“We will continue to improve our risk management capability. Our portfolio simplification is making the bank simpler. The next big step is exiting super and platforms and we are well progressed.”

Behind every operational and investment decision now for Westpac is the A$8 billion annual cost target announced last year. As non-core businesses are sold, this cost target is intended to apply from the bank’s 2024 financial year. 

The bank reduced costs by 27 per cent over the March 2022 half (or by 10 per cent, ex-notable items) as it progressed towards the cost base target. The bank reduced headcount by around 4000 (though FTE numbers fell by 1320).

Its expense to income ratio, at 52.5 per cent, trails the other three major banks by a mile.

Investment spending priorities look inflexible, and it’s what the bank discreetly does not say it is working on (since, especially in the dated technology core, it by and large is not) that will amplify doubts that the bank will regain much momentum as Commonwealth Bank and NAB (more than ANZ) consolidate their standings in the hierarchy of the oligopoly.

Westpac yesterday reported loan growth of just one per cent and system multiples tending towards zero.

The bank’s share of the all important mortgage market has decayed steadily over the last three years. It now stands at 22.6 per cent, a loss of 270 basis points over that time, with 80 bps in market share draining away over the last year.

The bank said yesterday it was faring well on the owner-occupied side of the market but underperformed on investment loans, once a strength for Westpac.

It’s a bit of a joke – make that an embarrassment – the commentary and outlook statement packaged up with the half year financial reports yesterday.

Scraps as serious talking points, when it’s the chronically aged and unwieldy core systems and the deadweight of the 2008 takeover of St George that badly need investment and overhaul.

No wonder – and still way under the radar – Westpac are hustling for a buyer for the bank. In March 2021, Banking Day explained the bank’s dilemmas and the board’s super-secret priorities, arguing an outright sale or radical reconstruction was the company’s destiny.

The incoming Labor government of Anthony Albanese will wise up in the end and jettison the four pillars policy to pave the way for a bid from, well, NAB.

Either that, or Albo’s treasurer will wave through the best offer Westpac can drum up from whichever big Asian bank can be convinced there is value and opportunity in the wreckage of Australia’s oldest bank.

Westpac is for sale and Peter King’s and John McFarlane’s time is running out.