Westpac's too-hard target abandoned

John Kavanagh

Westpac has abandoned the target it set last year to bring its operating expenses down to A$8 billion a year by the 2023/24 financial year.

Announcing the bank’s results for the year to September 2022 yesterday, Westpac chief executive Peter King said higher than expected inflation and the persistence of some compliance and regulatory costs led to a revision of the “hard” cost target.

Its new target is for operating expenses of A$8.6 billion in 2023/24 but this number will exclude the operating expenses of the specialist business unit, which is managing all the businesses the banks is selling, and any costs related to acquisitions or notable items.

The move might also reflect acceptance by the bank’s board and executive that you can’t cut your way to growth.

In the year to September, the bank cut its operating expenses by 19 per cent to $10.8 billion. A big contributor to lower expenses was a 7 per cent reduction in staff numbers (full time equivalents) to 37,476 and 119 branch closures.

The big spending cut did not do much for the bank’s performance. It reported a net profit of $5.7 billion for the year – an increase of 4.3 per cent over the previous year. On a cash basis, after excluding notable items, profit fell 1 per cent to $5.3 billion.

The bank’s biggest division, Australian consumer, made a profit of $3.3 billion – down 11.2 per cent from the previous corresponding period. The business banking division’s profit fell 14.7 per cent to $918 million.

The bank has been so intent on cutting headcount and branch numbers in its core business that it appears to have lost its focus on sales.

The Australian housing loan portfolio grew by 3 per cent to $467.4 billion, which is about half the rate of system growth over the period. Deposit growth of 5.7 per cent was also below par. The Australian consumer finance portfolio fell from $13.4 billion to $11.7 billion over the year (most of the fall was due to run-off the auto loan portfolio).

Customer numbers were flat at 12.7 million.

It was up to Westpac Institutional Bank, which turned around from a loss of $533 million in 2020/21 to a profit of $687 million, and Westpac New Zealand, which was up 13.2 per cent to $1.1 billion, to provide earnings growth.

The fall in cash earnings was largely the result of a turnaround in credit impairments, which went from a benefit of $590 million in 2020/21 to a charge of $335 million in the year to September. There was also a loss of revenue as the bank got out of several businesses.

Net interest income rose 2 per cent over the year to $17.2 billion. Total net operating income fell 8 per cent to $19.6 billion. 

The net interest margin fell 13 basis points to 1.93 per cent (on a cash basis, the fall was 17 bps to 1.87 per cent). All of the fall occurred in the first half, when rates were low and home loan competition intense. The margin increased 5 bps from 1.91 per cent to 1.96 per cent in the second half (on a cash basis, the increase was 5 bps to 1.9 per cent).

King said customers were well prepared to deal with rising rates. Sixty-eight per cent are ahead with their loan repayments. Twenty-eight per cent of home loan customers have more than 12 months of repayment in their offset accounts – down from 29 per cent a year ago.