Westpac Banking Corp. is seeking to slash its costs by nearly 40% in four years by shedding some specialist businesses, scaling back on branches and improving its processes after a recovery in the Australian economy from the COVID-19 pandemic helped the lender grow its profit three-fold in its fiscal first half of the year.
Australia's third-biggest bank by assets aims to have a cost base of A$8 billion by 2024, compared with A$12.7 billion in the last fiscal year that ended September 2020, a plan some analysts think may be tough to achieve.
CEO Peter King said at a May 3 call with analysts and reporters that Westpac plans to spend between A$3.5 billion and A$4.0 billion over the next three years in measures to cut its cost base, including an improvement in its processes and risk management systems. The significant customer remediation costs the company has been forced to incur "have been disappointing" and they must be reduced as the bank improves its control environment, King said.
"We would be very surprised if the cost target can be achieved, but we like that management has set an ambitious target," Nathan Zaia, a senior analyst at Morningstar, told S&P Global Market Intelligence in an email. Westpac's management would know what costs can be taken out as it gets rid of noncore businesses such as wealth and insurance and resets its cost base for the slimmed-down group. However, savings from simplifying processes and automation "can be difficult to forecast, particularly in a competitive environment," Zaia said.
Australian banks have been seeking to cut costs and focus on their core markets amid low interest rates and weak credit growth. Westpac's rival Australia and New Zealand Banking Group Ltd. aimed at a cost base of A$8 billion by 2022 but the COVID-19 pandemic has made that target hard to reach. Westpac is targeting lower customer remediation costs after being dogged by such charges and regulatory fines since the release of the Royal Commission report on banking misconduct in February 2019 that found lapses in customer protection and misselling by major Australian banks.
The cost targets "are ahead of consensus expectations and would be very positive for earnings if they are actually achieved," said Omkar Joshi, portfolio manager at Opal Capital Management. Westpac is looking at savings from its focus on digitization and lower corporate costs, but earnings will still be driven by net interest margins, lending growth and potential bad debts, he said. "However, the near-term outlook is positive," Joshi said.
Shedding baggage
CFO Michael Rowland said the specialist businesses targeted for divestment currently make about A$750 million of the bank's cost base. "The businesses where we've announced exits account for around 12% of that total on an ex-notable basis," Rowland said during the earnings call.
The bank will also have fewer branches that offer differentiated services. Westpac is closing 49 branches across Australia and New Zealand and reducing the ATM network by a further 3%. It will reduce the number of roles at its head office and cut space by more than 20%.
S&P Global Ratings said in a May 3 note that it expects Westpac's cost base to remain high in fiscal 2021 as the bank continues to invest in strengthening its risk governance. "Operating costs will fall in subsequent years with Westpac targeting technology improvements, streamlining operations, and exiting noncore businesses," Ratings said.
As part of its simplification strategy, Westpac is reviewing its New Zealand operations. King said the bank is focused on a demerger of its New Zealand operations, though it is open to other options. "But we can't see other options at the moment," the CEO said. The bank will make a decision on the New Zealand operations this fiscal half, he added.
Meanwhile, Westpac reported cash earnings of A$3.54 billion for the half year, more than triple the A$993 million in the prior-year period, mainly due to a significant turnaround in impairment charges. It reported an impairment gain of A$372 million in the first half of 2021, compared with a loss of A$2.24 billion in the first half of 2020.
The bank also reported expenses on notable items of A$754 million in the first half, including further provisions for remediation. The notable items reduced cash earnings in the period by A$282 million, without which the income would have been A$3.82 billion, it said.
Westpac's results reflect the recovery in the Australian economy due to massive stimulus and support packages during the height of the COVID-19 pandemic in the country. "We believe that the recovering economy, falling unemployment, and improved consumer and business sentiment will largely offset the risks posed by the fiscal support and loan repayment moratoriums coming to an end," Ratings said.