WBC - Westpac

[Lewylewylewy]

Couldn't find the old thread, so I started a new one (anyone know of a good way to search for them? The forum search never works for me and couldn't find on Google).

Noticed that there's a trading halt on WBC, pending an announcement - hope its not a bad one!

[huxley]

Couldn't find the old thread, so I started a new one (anyone know of a good way to search for them? The forum search never works for me and couldn't find on Google).

Noticed that there's a trading halt on WBC, pending an announcement - hope its not a bad one!



https://www.nzx.com/files/attachments/234568.pdf

[LAC]

http://www.sharetrader.co.nz/showthread.php?9081-Westpac&highlight=westpac

[iluab]

Well the market liked that result ay, up 2.8% on the ASX as I type ?

A continuation of dividend, ok a 7% drop in earnings, perhaps less than expected given ANZ at 13% I think it was, but perhaps also in consideration of a forward expectation that the RBA is done with interest rate cuts, perhaps more important for WBC than ANZ given their domestic focus, earnings stabilty from here forward.

[macduffy]

Yes, well received by the market although a few reservations as to whether maintaining the dividend will prove to be sustainable. But that's for the future!

[iluab]

Indeed mr macduffy, it's a bit like generally trying to predict the bottom for the aussie banks too, a long piece of string, although with aussie GDP forecast by some to be 3% and interest rates going no lower, one has to start to keep one eye on that, who decides, I don't know. I bought a few WBC at $30.90, comfortable with that for now.

Be interesting to see what analysts revise to over the coming week, an increment up I expect.

[percy]

The service at Barrington Mall Branch just keeps on getting worse.
After 10 minutes in the que the guy in front of me gave up .!
I went online and complained.
"We will answer your email in 24" or was it 48 hours, said it all to me.
Hopeless.

[iluab]

Nice to see the banks getting a lift on global bond yields rising, could be the start of a long awaited trend change here to some extent ?

[iluab]

Ref the attached chart, can anyone offer an informed view on the upside potential of Westpac from here.

8468

Chart: 18 month downward channel breakout and a golden cross to boot.

Macro: perhaps a bottom has been put in for the banks, interest rates stabilizing at their cyclical lows, both the Aussie and NZ economic outlooks on the up, US 10 bond yields on the rise, Yellen likely to go in Dec,

[macduffy]

Macro: perhaps a bottom has been put in for the banks, interest rates stabilizing at their cyclical lows, both the Aussie and NZ economic outlooks on the up, US 10 bond yields on the rise, Yellen likely to go in Dec,

Yes, that seems to be so with several Aussie analysts finding that the banks are back in fashion!

[macduffy]

Bell Potter's review of the Aust banking sector.

https://gallery.mailchimp.com/73ce8c5905e2e427971c29dd0/files/Bank_Note_5_December_2016.pdf

[macduffy]

All "four pillars" now trading at or near 12 month highs.

I trust those earlier shorts managed to cover themselves!

;)

[Bobdn]

Bell Potter's review of the Aust banking sector.

https://gallery.mailchimp.com/73ce8c5905e2e427971c29dd0/files/Bank_Note_5_December_2016.pdf

Thanks for posting this. I have ANZ, which is helping to off set the pain I'm feeling from WHS :)

[huxley]

Yeah man, the ANZ's been pretty good since buying last November. Long on this one with the DRP. Shame ANZ & WBC are the only two which offer nz imputation.

[macduffy]

Yeah man, the ANZ's been pretty good since buying last November. Long on this one with the DRP. Shame ANZ & WBC are the only two which offer nz imputation.

Live in hope! NAB have been known to offer NZ (part) imputation in the past - it may happen again one day.

:)

[winner69]

This guy reckons WPC will halve ...so the BIG SHORT

http://www.smh.com.au/business/markets/international-traders-look-to-australia-to-hit-on-next-big-short-westpac-targeted-20170222-guj633.html

[Snoopy]

This guy reckons WPC will halve ...so the BIG SHORT

http://www.smh.com.au/business/markets/international-traders-look-to-australia-to-hit-on-next-big-short-westpac-targeted-20170222-guj633.html

"One of Guennouni's first shorts at Meridian is Westpac. Australian lenders stand to suffer more than global peers as expected changes to regulations on risk-weighted assets dampen profitability, Guennouni wrote in a 46-page short report published last month."

"The trade doesn't depend on a hard landing in China or a commodities rout, he wrote. Shares of Westpac, which he sees as the lender most exposed to this risk, may fall from 30 per cent to 50 per cent, he said, without specifying a time frame. Westpac declined to comment."

The article goes on to say:

"Betting against the local banks has been so unsuccessful that the trade has been nicknamed the "widow maker." Expectations for a local housing-market crash or a sharp deceleration in China's economy have failed to materialise for bearish investors waiting for lenders' stock prices to slump."

Guennouni counters:

"Most people have been shorting Australian banks as a part of a macro short on China and the economies linked to it," Guennouni said. Ours is "a bottom-up trade, not macro-driven."

Who to believe? I agree that banks will not be the one way bet they have seemed to be in the past going forwards. I haven't checked out Westpac specifically. But for ANZ the current shareprice is more than justified on a yield that seems sustainable, with all the recapitalisation as part of the changed banking regulations already done.

SNOOPY

[huxley]

A collapse of 30-50% would be massive..

[percy]

A collapse of 30-50% would be massive..

Last time they had a huge drop was in 1990/91.
Can't remember whether they fell 30% or 50%.Australian Commercial property market caught them out.
This time it will be different,........................it will be Australian Residential property.!!..lol.
Prospects of being taken over by Kerry Packer focussed the boards' attention.!

[huxley]

This time it will be different,........................it will be Australian Residential property.!!..lol.



Lol indeed

[winner69]

A collapse of 30-50% would be massive..

Fell by nearly 50% in 2007/08 and nearly 30% in in early 2015

That's not long ago eh ..... and such falls have happened

But no worries - this time it's different they say


https://au.finance.yahoo.com/q/bc?s=WBC.AX&t=my&l=on&z=l&q=l&c=

[huxley]

Fell by nearly 50% in 2007/08 and nearly 30% in in early 2015

That's not long ago eh ..... and such falls have happened

But no worries - this time it's different they say


https://au.finance.yahoo.com/q/bc?s=WBC.AX&t=my&l=on&z=l&q=l&c=

A thought crossed his mind: How do you make poor people feel wealthy when wages are stagnant? You give them cheap loans.

[winner69]

A thought crossed his mind: How do you make poor people feel wealthy when wages are stagnant? You give them cheap loans.

A thought crossed my mind Huxley - if this time it's not different the whole market might fall 30%-50%

[huxley]

A thought crossed my mind Huxley - if this time it's not different the whole market might fall 30%-50%

Don't worry, I'll mention the super secret code word when it's time to sell everything :)

[percy]

The service at Barrington Mall Branch just keeps on getting worse.
After 10 minutes in the que the guy in front of me gave up .!
I went online and complained.
"We will answer your email in 24" or was it 48 hours, said it all to me.
Hopeless.
Well the fun continues.I had to phone Westpac to cancel a cheque of mine that went missing.
Bad idea.Wait,and wait and wait,then endless drivel,then wait,and more endless drivel.Finally a real person answered and the cheque was cancelled.
Revenge... Today I had an email from Westpac asking to comment on their service..................
Don't think they will ever ask me again.!!!..........Well I did tell them I thought my time was more valuable than theirs....amongst other things...............

[janner]

Well the fun continues.I had to phone Westpac to cancel a cheque of mine that went missing...

Hope it was not one that was " In the post ". :-)))))

Which reminds me .. I still have to pay that $6.90 road toll..

[percy]

Hope it was not one that was " In the post ". :-)))))

Which reminds me .. I still have to pay that $6.90 road toll..

No not one,that one is still safely "in the post."

[janner]

No not one,that one is still safely "in the post."

:-))) Of course...

[limmy]

Aussie banks not expected to be performing well , with new government regulations.

[Tomtom]

Well the fun continues.I had to phone Westpac to cancel a cheque of mine that went missing.
Bad idea.Wait,and wait and wait,then endless drivel,then wait,and more endless drivel.Finally a real person answered and the cheque was cancelled.
Revenge... Today I had an email from Westpac asking to comment on their service..................
Don't think they will ever ask me again.!!!..........Well I did tell them I thought my time was more valuable than theirs....amongst other things............... Unfortunately WBC has consistently trailed it's peers on NPS in New Zealand, every couple of years they announce an initiative to change their position with some corporate jargon thrown in (agile and digital at the moment I believe) and then carry on as they where before.

[Snoopy]

Couldn't find the old thread, so I started a new one (anyone know of a good way to search for them? The forum search never works for me and couldn't find on Google).

Noticed that there's a trading halt on WBC, pending an announcement - hope its not a bad one!

I found the old thread Lewy. Just do an 'Advanced' forum search and look for threads with WBC in the title. I think that is the easiest way. However the old thread was titled 'Westpac Banking Corporation'. In fact the only entity you can buy shares in is 'Westpac Group'. I think the dropping of that middle word 'banking' is quite important. So I have decided to build on your thread instead of the old one.

SNOOPY

[Snoopy]

So I have decided to build on your thread instead of the old one.


I aim to assess whether the 'Westpac Group' is a suitable candidate to which to apply the (Mary) 'Buffett' growth model .

WBC, incorporated in Australia, but also listed on the NZX describes their operation of their business in the FY2015 Annual Report as follows:

"to be one of the world's great service companies helping our customers, communities and people to prosper and grow"

It would be an oversimlification to think of Westpac just as a traditional bank. They have a strong wealth and insurance business through associated company BT Group, in which they sold down their controlling stake in FY2015. The business is based around strong Australian and New Zealand geographic foundations. The New Zealand business is a self contained unit.

The business objectives are to support:

1/ Australian and New Zealand consumers.
2/ Australian and New Zealand businesses, both large and small
2/ Regional Trade and Capital Flows for business customers via the WIB ("Westpac Institutional Banking Division".)
3/ A 'digital ready infrastructure' for the future.

Major Competitors in this sector are listed in order by $A revenue (interest income).

1/ Commonwealth Bank of Australia: $33,817m
2/ Westpac Bank: $31,822m
3/ ANZ Bank: $29.951m
4/ National Australia Bank $27,629m

Conclusion: As number two in the market, WBC passes the first Buffett Point test.

SNOOPY

[Yoda]

Is this the same Westpac that sold 30 mil shares in ATM on 31/5/17?
They must be gutted today. Maybe it's more complicated than that.......

[Snoopy]

Is this the same Westpac that sold 30 mil shares in ATM on 31/5/17? They must be gutted today. Maybe it's more complicated than that.......


Westpac run a wealth management business where they manage fund based share portfolios on behalf of clients. Despite only holding a minority stake in what used to be a fully owned wealth management subsidiary, BT, BT is still classed as a 'related corporate body' to Westpac (apparently!). Thus if BT make changes to their clients portfolios, then Westpac must report this to the NZX. All these funds will be in trust for clients. So I expect that selling 30m ATM shares will make not one jot of difference to shareholders in 'Westpac Group'. It was probably a smart move on BT's part though. I don't think that the A2 company will be able to get hold of enough 'A2 milk raw product' to drive the volumes of sales and future profits that an A2 share price nearing $4 implies.

SNOOPY

[Snoopy]

A few reservations as to whether maintaining the dividend will prove to be sustainable. But that's for the future!


Bank results tend to be horribly complex if you drill down into them. Fortunately for potential shareholders, Westpac release a 'statutory result' and a 'cash result'. The 'cash result' is of great interest to shareholders because dividends tend to be paid from cash available. Plus all of those horrible normalizing corrections are done for you! But some investors are interested in a true 'normalized profit' result. To calculate this, there are at least a couple of corrections you need to make to the 'cash result' (or a whole heap more corrections to the statutory result). My take on the 'normalized result' is in the table below. (Note all dollar figures quoted are Australian dollars.)



Westpac Group (WBC)FY2016FY2015FY2014FY2013FY2012


Cash Profit$7,822m$7,820m$7,628m$7,063m$6,564m


add back after tax Expense effect of buying J O Hambro Capital Management0.7x$38m


less Amortization & Impairment of Intangible Assets and Deferred Expenditure$216m$221m$222m$224m$231m


less after tax Net gain on disposal of Assets0.7x$1m0.7x$103m0.7x$97m0.7x$67m0.7x$46m


equals Normalized Profit$7,605m$7,527m$7,338m$6,792m$6,328m



The annual reports (under Group Segment Information) contains notes on why those adjustments to produce the 'cash result' were made.

Adjustment 1

-----

An historic merger with St.George and the acquisitions of J O Hambro Capital Management (JOHCM) and Lloyds Australia resulted in the recognition of identifiable intangible assets. These assets include intangibles related to core deposits, customer relationships, management contracts and distribution relationships. These intangible items are amortised over their useful lives, ranging between four and twenty years. The amortisation of intangible assets (excluding capitalised software) is a cash earnings adjustment because it is a non-cash flow item and does not affect cash distributions available to shareholders.

Costs (spread over several years) associated with the acquisition of Lloyds have been treated as a cash earnings adjustment as they do not impact the earnings expected from the acquired businesses following the integration period.

-----

Put in this light, the adjustments to Statutory Profit are logical. However, it is equally true to say that the intangibles related to the finite lives of core deposits, customer relationships, management contracts and distribution relationships are recognised by Westpac management. And all the money paid for those 'eroding intangibles' by Westpac management was 'real cash' not so long ago. Therefore I contend that these 'amortised intangible' figures should be removed from the cash profit to get a normalised profit picture.

Adjustment 2

It is undisputed that selling an asset generates real cash. However, once sold an asset cannot be sold again. I therefore contend that asset sales should be removed from the cash result to create a normalised operating result.

SNOOPY

[Snoopy]

Adjustment 2

It is undisputed that selling an asset generates real cash. However, once sold an asset cannot be sold again. I therefore contend that asset sales should be removed from the cash result to create a normalised operating result.


While noticing these reported assets sales I encountered a mystery. Some of these assets sales were detailed in the respective annual reports, but not all. For example:

1/ the $1m gain in FY2016 lines up neatly with the $1m profit on the sale of Westpac's interests in the Soloman Islands and Vanuatu.
2/ The $46m sale in FY2012 lines up neatly with the $46m profit received for the sale of the company's VISA shares in that year.

So far so good. But I was unable to discern what assets were sold over FY2015, FY2014 and FY2013 to generate those other asset sale returns. Any help discerning just what assets were sold would be appreciated. It seems incongruous that $267m in profit would appear on the balance sheet over three years without any explanation!

SNOOPY

PS

1/ I see in the FY2015 results announcement (section 2.2.5) that $60m of income from property sales were booked during that year. Detail in the FY2012 report suggests two of these properties were 182 George Street and 33-35 Pitt Street in downtown Sydney.
2/ In the FY2014 results announcement, section, section 3.5, the Group’s remaining Visa shares were sold in the half 2HY2014 and the profit on sale was broadly in line with First Half 2014 ($41 million).

[macduffy]

There is probably a distinction being made between assets which form part of the business - the interest in Visa; minority interests in other banks, finance co's etc - and non-trading fixed assets such as surplus or redundant branch properties, motor vehicles, equipment etc. Is it possible to separate these in your analysis, Snoopy?

[Snoopy]

There is probably a distinction being made between assets which form part of the business - the interest in Visa; minority interests in other banks, finance co's etc - and non-trading fixed assets such as surplus or redundant branch properties, motor vehicles, equipment etc. Is it possible to separate these in your analysis, Snoopy?

Prior to FY2015, there was a section in the Annual Report called 'Property Plant and Equipment'. This neatly detailed acquisitions and disposals during the year (See Note 13, AR2014) . Westpac owned only around 2% of the property they occupied back then (AR2014, p124).

In AR2015 basic figures like 'depreciation of property' are listed in the company expenses. But there is none of the detail that was in prior reports. Nothing on acquisitions or disposals. 'Non interest income' has a line which reads 'Net gain on Disposal of Assets'. But there is no breakdown of what these assets were. They could have been interests in companies (like VISA), or surplus premises. The only way I can fill in the gap is if something is mentioned in the commentary section of the annual report, or a presentation to shareholders.

I don't want to get too hung up on this because relative to the whole Westpac operation, these items are small. However, it is quite on the cards that Westpac might choose to sell something that is not small. And for consistency, I would like to get this process right. Thanks for your suggestions. I will keep my eyes open.

SNOOPY

[Snoopy]

WBC passes the first Buffett Point test.




Westpac Group (WBC)FY2016FY2015FY2014FY2013FY2012


Normalized Profit {A}$7,605m$7,527m$7,338m$6,792m$6,328m


Shares on Issue EOFY {B}3,313m3,140m3,114m3,087m3,043m


Earnings Per Share {A}/{B}$2.30$2.40$2.36$2.20$2.08



A lower year on year result in FY2016 is not enough to obscure a longer term trend.

Conclusion: Pass Test

SNOOPY

[Yoda]

Westpac run a wealth management business where they manage fund based share portfolios on behalf of clients. Despite only holding a minority stake in what used to be a fully owned wealth management subsidiary, BT, BT is still classed as a 'related corporate body' to Westpac (apparently!). Thus if BT make changes to their clients portfolios, then Westpac must report this to the NZX. All these funds will be in trust for clients. So I expect that selling 30m ATM shares will make not one jot of difference to shareholders in 'Westpac Group'. It was probably a smart move on BT's part though. I don't think that the A2 company will be able to get hold of enough 'A2 milk raw product' to drive the volumes of sales and future profits that an A2 share price nearing $4 implies.

SNOOPY

Thanks Snoopy, very helpful. I imagine there could be quite a drop in SP if they miss their future targets.

[Snoopy]

Westpac Group (WBC)FY2016FY2015FY2014FY2013FY2012


Normalized Profit {A}$7,605m$7,527m$7,338m$6,792m$6,328m


Shareholder Equity EOFY {B}$58,181m$53,915m$49,337m$47,537m$46,219m


Return on Shareholder Equity {A}/{B}13.1%14.0%14.9%14.3%13.7%



We aren't far away from that 15% ROE hurdle in any of the last five years. But near enough is not good enough.

Result: Fail Test

SNOOPY

[Snoopy]

Westpac Group (WBC)FY2016FY2015FY2014FY2013FY2012


Normalized Profit {A}$7,605m$7,527m$7,338m$6,792m$6,328m


Gross Interest Revenue {B}$31,822m$32,215m$32,248m$33,009m$36,873m


Net Profit Margin {A}/{B}23.9%23.3%22.8%20.6%17.2%



A 'steady with inflation increase in margins over the last three comparative figures, and a rather stronger rise before that.

Result: Pass Test

SNOOPY

[Snoopy]

Warren Buffett's scanning of the 'growth potential' of a company can be summarized in four quick questions.

Q1/ Does Westpac Group have a top three market position in the markets in which it chooses to operate? (Ref: my post 32)
A1/ Yes

Q2/ Does Westpac Group have a 'normalised profit' increasing 'earnings per share trend'? (Ref: my post 39)
A2/ Yes

Q3/ Does Westpac Group have a record of earning a superior ( >15% ) return on shareholder equity? (Ref: my post 41)
A3/ No

Q4/ Does Westpac Group have the capability of operating at increasing Net Profit margins? (Ref: my post 42)
A4/ Yes

Overall Conclusion

Westpac is not able to satisfy all the requirements to apply Warren Buffett's compounding growth model. This does not mean that Westpac is necessarily a poor investment going forwards. It just means that Westpac must be analyzed in a different way. It might be sensible to regard Westpac as a pure 'dividend play' from here.

SNOOPY

[macduffy]

I think you're right there, Snoopy. Indeed, that applies to all the Aussie banks at present, IMO.

[Snoopy]

It might be sensible to regard Westpac as a pure 'dividend play' from here.


I now want to use the actual dividend data for FY2012 to FY2016 inclusive to build a 'scenario analysis' looking forwards.

The basis for my model is that market conditions over the last five years are broadly representative of what we might expect over the next five years. Yet in recent times, the capital base of the company has been expanded, because of Basel 3 international banking standards requiring a greater capital base to support the existing bank loan book. The expansion of WBC's capital base has been as a result of a share issue, including a share purchase plan offer to existing shareholders and institutional share placement. Unfortunately for existing shareholders, this means that broadly the same income stream must now be distributed among the greater number of shares now on issue. In other words, unless there is a corresponding growth in profitability from the new share capital (there won't be, because the new capital is required to be used as a beefed up safety net), earnings per share can be expected to decrease in the future.

The following table shows what would have happened if the number of shares on issue today was constant over the previous five years. I have left out the 'special dividends' (10c paid in the second half of FY2013 and 10c paid in the first half of FY2014) because these payments were made when Westpac had an excess of capital. Subsequent to these payments, late in CY2015, Westpac had to raise more capital in their plan to fulfill Basel 3 capital requirement standards. Had they known this at the time, those special dividends probably wouldn't have been paid out. Westpac do not currently claim to have excess capital. So it would be inappropriate to use historic 'excess capital' dividend payments for my present day dividend payment modelling.



FY2012FY2013FY2014FY2015FY2016


'Cash Profit' as reported {A}$6,564m$7,063m$7,628m$7820m$7,822m


Gross Annual Dividend: (final) + (interim) as reported {B}$4,924m$5,429m$5,527m$5,752m$6,128m


Normal Dividend Payout ratio {A}/{B}75.0%76.9%72.5%73.6%78.3%


Gross Annual Dividend (NZ Perspective *) 'cps' (final) + (interim)$1.69.6$1.86.1$1.91.5$1.96.4$2.00.4


Actual Number of Shares on Issue EOFY3,043m3,087m3,114m3,140m3,313m


Scenario Number of Shares on Issue EOFY3,313m3,313m3,313m3,313m3,313m


Scenario Adjusted Gross Annual Dividend (NZ Perspective *) 'cps' (final) + (interim)$1.55.8$1.73.4$1.80.0$1.86.1$2.00.4




* In this instance "NZ Perspective" means dividends continue to be expressed in $A, but the $A dividend is a 'gross dividend' because NZ does not recognize Australian Franking Credits. In addition 'NZ Imputation Credits' are added to the $A dividend using the exchange rate $NZ1 = $A0.95.

SNOOPY

[hardt]

Westpac run a wealth management business where they manage fund based share portfolios on behalf of clients. Despite only holding a minority stake in what used to be a fully owned wealth management subsidiary, BT, BT is still classed as a 'related corporate body' to Westpac (apparently!). Thus if BT make changes to their clients portfolios, then Westpac must report this to the NZX. All these funds will be in trust for clients. So I expect that selling 30m ATM shares will make not one jot of difference to shareholders in 'Westpac Group'. It was probably a smart move on BT's part though. I don't think that the A2 company will be able to get hold of enough 'A2 milk raw product' to drive the volumes of sales and future profits that an A2 share price nearing $4 implies.

SNOOPY

I remember that same talking point from a few on A2 milk back at $1.

[winner69]

One has to think that banks on this side of the world have been a bit 'reckless' with their lending of late

http://www.smh.com.au/business/the-economy/moodys-move-shines-light-on-australias-home-loan-risks-20170619-gwufh4.html

[Snoopy]

One has to think that banks on this side of the world have been a bit 'reckless' with their lending of late

http://www.smh.com.au/business/the-economy/moodys-move-shines-light-on-australias-home-loan-risks-20170619-gwufh4.html


Interesting article. The one thing I would add is that 'those that buy in just before the crash are the ones that get into the most trouble'.

"The proportion of the highest loan-to-value mortgages has been steadily decreasing as the major banks have toughened up on loans to buyers seeking to borrow for more than 90 per cent of the value of their home."

Sounds good to me

"However, soaring house prices and stagnant wage growth mean that most new business is still being written in the 60 to 80 per cent loan-to-value range."

What they don't say is that 'soaring house prices' will strengthen the equity position of all those home owners who bought two or more years ago, thus decreasing the risk of the property loan portfolio as a whole. And if new loans are being made at 80% of loan value, that means property prices in Sydney and Melbourne will have to fall 20% before these customers get into a negative equity position. This lending sounds more conservative than what is going on in the New Zealand market?

SNOOPY

[Snoopy]

It might be sensible to regard Westpac as a pure 'dividend play' from here.


Unlike the ANZ, Westpac do not pin down their dividend policy to a preferred payout ratio. Yet, the Chairman has had the following to say:

From Lindsay Maxsted's Chairmans address in AR2016

"We recognise the importance of dividends for shareholders, and the franking credits attached to those dividends. Our approach is to continue to make dividend payments that are
sustainable in the long-term; that is, ensuring we retain enough of our earnings to hold our capital levels while also retaining sufficient capital for growth. It is also about maximising the payment to distribute franking credits. We are prepared to wear some volatility in the payout ratio to give shareholders some consistency in dividend payments but we must continue to anchor our decision to a long-term sustainable position."

From Lindsay Maxsted's Chairmans address in AR2015

"While dividends have increased, because of our capital initiatives, the path of increases has slowed with a one cent per share rise over the last two halves. We continue to pay out a high portion of profits as dividends to distribute franking credits that are valued by shareholders. It is important to highlight that despite increasing capital, we have maintained our dividend approach of steadily
increasing dividends within a sustainable pay-out ratio."

Make of that what you will. To me it sounds like Westpac doesn't want to cut dividends. But it doesn't sound like the small increases in 'dps' that shareholders have been lead to expect every year is a given either.

SNOOPY

[dela47]

Unlike the ANZ, Westpac do not pin down their dividend policy to a preferred payout ratio. Yet, the Chairman has had the following to say:

From Lindsay Maxsted's Chairmans address in AR2016

"We recognise the importance of dividends for shareholders, and the franking credits attached to those dividends. Our approach is to continue to make dividend payments that are
sustainable in the long-term; that is, ensuring we retain enough of our earnings to hold our capital levels while also retaining sufficient capital for growth. It is also about maximising the payment to distribute franking credits. We are prepared to wear some volatility in the payout ratio to give shareholders some consistency in dividend payments but we must continue to anchor our decision to a long-term sustainable position."

From Lindsay Maxsted's Chairmans address in AR2015

"While dividends have increased, because of our capital initiatives, the path of increases has slowed with a one cent per share rise over the last two halves. We continue to pay out a high portion of profits as dividends to distribute franking credits that are valued by shareholders. It is important to highlight that despite increasing capital, we have maintained our dividend approach of steadily
increasing dividends within a sustainable pay-out ratio."

Make of that what you will. To me it sounds like Westpac doesn't want to cut dividends. But it doesn't sound like the small increases in 'dps' that shareholders have been lead to expect every year is a given either.

SNOOPY


Considering entering at current levels for long term dividend stream.

P/E back to around 13 which is about average over the last 10 years for Westpac.

Are we now around fair value? Or is there potential for short term upside given the drop we've had over the last two months (to add to the attractive yield)?

Or, alternatively, are current levels a bit high given heightened risk of property volatility in Aus?

[percy]

Considering entering at current levels for long term dividend stream.

P/E back to around 13 which is about average over the last 10 years for Westpac.

Are we now around fair value? Or is there potential for short term upside given the drop we've had over the last two months (to add to the attractive yield)?

Or, alternatively, are current levels a bit high given heightened risk of property volatility in Aus?

I can't see life getting any easier for the Australian Banks over the next few years.
Strong headwinds.
Take care.

[Snoopy]

Are current levels a bit high given heightened risk of property volatility in Aus?


I am not sure that 'property volatility' is the issue in Australia, any more than property in Vancouver, London, San Francisco or any other city where the property market is being supported by historically low interest rates. I think the issue is more property volatility overlaid on what seems to be a massive overexposure of the total Australian bank loan portfolio to 'Residential Property'.

The graph in Winner's referenced SMH article that caught my eye was the 'Loan Concentration' share, showing "Australian residential property" making up over 60% of the total bank loan book. At the opposite end of the scale was Hong Kong with residential property there representing just 15% of the local bank's loan book. The problem with that kind of comparison is that a lot of 'Hong Kong residential' is in apartment buildings which would have a lot less room for development and real value enhancement than the Oz quarter acre section. Also Hong Kong, being the 'trading capital of the world' and also a springboard for investment in to China, means there will be proportionately more 'business opportunities' out there where banks, forged on a history of trade, are likely to see as investment opportunities.

Put simply, Australian residential investment is likely to be overall a better quality investment, in terms of a bank recovering their money in a downturn, than a Hong Kong apartment might be. Australian Banks are not so keen, in relative terms, on investment in small businesses. So many small business owners take out a mortgage on their house to develop their business. Because if they borrowed from the bank to develop a business, the 'business borrowing rate' would be more expensive. Thus despite the bare statistics seeming to show a gross over-allocation of funds to the Australian residential property market, many of these loans are funding businesses, not property speculation as that bare bar graph, if studied alone, might picture the situation.

SNOOPY

[percy]

I would prefer to own a Hong Kong appartment than a quarter acre in Toowoomba.
Plenty of buyers with real money in Hong Kong.

[Snoopy]

I would prefer to own a Hong Kong apartment than a quarter acre in Toowoomba.
Plenty of buyers with real money in Hong Kong.


I agree that I would rather own a quarter acre section in Sydney than Toowoomba.

Percy's post illustrates another point I forgot to mention. There are lots of millionaires in Hong Kong, and across the border in China. Despite the high apartment prices in HK, many of these people may just pay cash for their high priced Hong Kong apartments, so bypassing the need to use a bank at all for property purchases.

SNOOPY

[macduffy]

It's true, snoopy, that many of these residential loans are funding businesses. Many such business loans are difficult to secure from a lender's viewpoint, especially where the premises are leased; charges held over vehicles and stock etc. Proprietors' residential properties are often the only tangible security available to a bank.

[Snoopy]

Are we now around fair value? Or is there potential for short term upside given the drop we've had over the last two months (to add to the attractive yield)?


Let's see what a 'capitalised dividend value' calculation says about this. Using data from my post 45:



Scenario FY2012Scenario FY2013Scenario FY2014Scenario FY2015Scenario FY2016Five Year Average


Scenario Adjusted Gross Annual Dividend (NZ Perspective *) 'cps' (final) + (interim)$1.55.8$1.73.4$1.80.0$1.86.1$2.00.4$1.79. 1



The other key figure in this calculation a bit more subjective, and you as an investor need to answer the question.

"For a bank such as WBC, what is the gross yield that would feel comfortable with?"

You could say that banks are a quasi-utility, that will be there 'through thick and thin'. I use a 6.0% figure for those.

Yet the WBC, like all the big 4 Aussie banks, has an ivory tower institutional division that does all sorts of high powered stuff with currencies, futures and options. Regular bank customers on the street would go into shock if they found out if they found out their safe solid bank was doing this stuff. Luckily it is so incomprehensible that even half the people who work in the WBC institutional division do not understand what is going on. So no-one worries about it. Very occasionally it all blows up with dramatic effect, such as in the GFC. Boring bank shares I would accept a 6% yield from. But with 'institutional stuff' going on behind the scenes I would add in a further 0.5% 'risk factor' to the WBC.

So my answer to the question I posed is 6.5%:

Divide 'return' by 'the yield' and you get the share price that I would feel comfortable paying:

$A1.79.1 / 0.065 = $A27.55 or in NZ dollar terms

$A27.55 / 0.95 = $NZ29.00

Current share price on the NZX as I write this is $NZ31.40, which is 8.2% above my 'comfortable valuation'. So this means I should sell down, or does it?

SNOOPY

[traineeinvestor]

I agree that I would rather own a quarter acre section in Sydney than Toowoomba.

Percy's post illustrates another point I forgot to mention. There are lots of millionaires in Hong Kong, and across the border in China. Despite the high apartment prices in HK, many of these people may just pay cash for their high priced Hong Kong apartments, so bypassing the need to use a bank at all for property purchases.

SNOOPY

This is correct. Both the HK banking environment and the HK property market are very different from Australia's (and New Zealand's for that matter). Due to a combination of factors, equity levels in HK properties are extremely high by just about any standard you could reasonably apply - almost all mortgages are P+I, the HKMA imposes very high LTV requirements and there are a reasonable number of cash buyers (either locally or from the Mainland) but not as many as the media and rumour sometimes suggest. Put this way, during the period from the 1997 peak to the 2003 low, property prices fell around 60% and were were no bank failures (one small bank was given a soft bail out). The bank's direct exposure to the risk of a property downturn is considerably lower today than it was in 1997.

However, the banks have indirect exposure in two ways which do not show up in the 15% exposure. The first is that the banks lend to property developers who offer second mortgage financing to people who buy off the plans. Given that most HK developers have very strong balance sheets, I doubt if the banks would be at any significant risk from developers collapsing - no developer of any significance went under last time the HK property market crashed. The second is that the HKMA's LTV restrictions have driven cash-poor buyers to borrow from non-bank lenders which are not regulated by the HKMA (and only very lightly regulated under other regulations). The banks' exposure to non-bank lenders has been rising and the HKMA has recently introduced some tightening regulations in this area. Getting precise figures on the size of this sector of the property financing market has been difficult, but given that HK incorporated banks have high capital levels, I have almost no concerns about banks getting into difficulty no matter how bad the next property downturn is.

Mortgagee sales have been ultra-rare over the last decade or so. There were a tiny handful after the GFC (and, if you blinked, you would have missed them). So long as title deeds are available, the process of enforcing a mortgage is quite smooth.

Since at least some of these factors are not present in the Australian market, I query whether a comparison of the risk exposure of Australian banks and HK banks is terribly useful.

As for whether it is better to own property in one place or another - YMMV.

As far as Westpac is concerned, I've held it since it was listed as Westpac Trust, largely because I wanted a steady flow of dividends to cover NZ bills while I am living overseas. It's been a great investment in that respect and I'm struggling to see a reason to sell.

[macduffy]

Does your 6.5% "comfortable" gross yield vary, depending on prevailing interest rates, Snoopy? What about an RBNZ base rate of, say, 10? or 1%? I assume the 6.5% rate is what you would accept in current circumstances?

[Snoopy]

Does your 6.5% "comfortable" gross yield vary, depending on prevailing interest rates, Snoopy? What about an RBNZ base rate of, say, 10? or 1%? I assume the 6.5% rate is what you would accept in current circumstances?


Great question Macduffy. I am old enough to remember the days of 20% mortgage rates, and remain astonished at low mortgage rates can go as evidenced by what is available today. When setting an 'acceptable return' for a business I tend to look through these extremes. I take a 'whole of interest rate cycle view' if you like. I would regard 6.5% as a little high for current circumstances. But I do expect interest rates to rise. As an investor, I tend to look out three to five years on the interest rate horizon.

I would not be comfortable buying an investment that has a 'fair value' return of 5.5% today if I knew that the fair value return in as short as a year's time might be 6.5%. To answer your question directly Macduffy. I don't think that 6.5% for a top tier bank investment is fair in current circumstances. My instinct would be to accept a lower return than that. But because I expect interest rates to rise, I do expect that 6.5% will be fair given my current interest rate horizon. You might consider that my valuation has a built in safety factor to account for interest rate rises in the forseeable future.

SNOOPY

[Snoopy]

I now want to use the actual dividend data for FY2012 to FY2016 inclusive to build a 'scenario analysis' looking forwards.


I now wish to consider Westpac from the Australian investor's perspective. WBC is listed on the NZX. But as New Zealand investors, we would be overestimating our power on the listed markets if we were to assume that our locally traded shares would do anything other than follow the Australian market lead. This means that how WBC looks to Australian investors on the ASX will be the primary driver of what happens to WBC on the NZX.

All dollar figures below in table are in Australian dollars.



FY2012FY2013FY2014FY2015FY2016


'Cash Profit' as reported {A}$6,564m$7,063m$7,628m$7820m$7,822m


Annual Dividend: (final) + (interim) as reported {B}$4,924m$5,429m$5,527m$5,752m$6,128m


Normal Dividend Payout ratio {A}/{B}75.0%76.9%72.5%73.6%78.3%


Annual Dividend (Aus Perspective *) 'cps' (final) + (interim)80c+82c= $1.6284c+86c=$1.7088c+90c=$1.9892c+ 93c= $1.8594c+94c=$1.88


Actual Number of Shares on Issue EOFY3,043m3,087m3,114m3,140m3,313m


Scenario Number of Shares on Issue EOFY3,313m3,313m3,313m3,313m3,313m


Scenario Adjusted Annual Dividend (Aus Perspective *) 'cps' (final) + (interim) {C}$1.48.8$1.58.4$1.67.3$1.75.3$1.88


Scenario Adjusted Gross Annual Dividend (30% tax rate) {C}/0.7$2.12.6$2.26.3$2.39.0$2.50.4$2.68.6



* Aus Perspective excludes NZ imputation credits and AUS franking credits in this instance. Historic Special dividends have been excluded, because they are not representative of likely future payouts under the current capital structure.

SNOOPY

[Snoopy]

Let's see what a 'capitalised dividend value' calculation says about this. Using data from my post 45:



Scenario FY2012Scenario FY2013Scenario FY2014Scenario FY2015Scenario FY2016Five Year Average


Scenario Adjusted Gross Annual Dividend (NZ Perspective *) 'cps' (final) + (interim)$1.55.8$1.73.4$1.80.0$1.86.1$2.00.4$1.79. 1



The other key figure in this calculation a bit more subjective, and you as an investor need to answer the question.

"For a bank such as WBC, what is the gross yield that would feel comfortable with?"

You could say that banks are a quasi-utility, that will be there 'through thick and thin'. I use a 6.0% figure for those.

Yet the WBC, like all the big 4 Aussie banks, has an ivory tower institutional division that does all sorts of high powered stuff with currencies, futures and options. Regular bank customers on the street would go into shock if they found out if they found out their safe solid bank was doing this stuff. Luckily it is so incomprehensible that even half the people who work in the WBC institutional division do not understand what is going on. So no-one worries about it. Very occasionally it all blows up with dramatic effect, such as in the GFC. Boring bank shares I would accept a 6% yield from. But with 'institutional stuff' going on behind the scenes I would add in a further 0.5% 'risk factor' to the WBC.

So my answer to the question I posed is 6.5%:

Divide 'return' by 'the yield' and you get the share price that I would feel comfortable paying:

$A1.79.1 / 0.065 = $A27.55 or in NZ dollar terms

$A27.55 / 0.95 = $NZ29.00

Current share price on the NZX as I write this is $NZ31.40, which is 8.2% above my 'comfortable valuation'. So this means I should sell down, or does it?



Let's see what a 'capitalised dividend value' calculation goes using the 'Australian View' data. Using data from my post 60:



Scenario FY2012Scenario FY2013Scenario FY2014Scenario FY2015Scenario FY2016Five Year Average


Scenario Adjusted Gross Annual Dividend (Aus Perspective) 'cps' (final) + (interim)$2.12.6$2.26.3$2.39.0$2.50.4$2.68.6$2.39. 4



I start from the 'Average Across Five Scenarios' 'Gross Dividend: Aussie Investor Perspective'. That figure comes out at $2.394 per share. And this is one key to the valuation.

The other key figure is a bit more subjective, and you as an investor need to answer the question.

"For a bank such as WBC, what is the gross yield that an investor would feel comfortable with?"

You could say that banks are a quasi-utility that will be there through thick and thin. I use a 6.0% figure for those.

Yet WBC, like all the big 4 Aussie banks, has an ivory tower institutional division that does all sorts of high powered stuff with currencies, futures and options. Boring bank shares I would accept a 6% yield from. But with 'institutional stuff' going on behind the scenes I would add in a further 0.5% 'risk factor' to WBC.

So my answer to the question I posed is 6.5%. From an Australian perspective though, I get a slightly different answer. The New Zealand Official cash rate is 1.75%. The Australian Official Cash Rate is 1.5%. To reflect this difference, I am reducing the yield I require from WBC by the difference in those two figures, 0.25%. This means the new yield I am happy with is 6.25%

Divide 'return' by 'the yield' and you get the share price that I would feel comfortable paying:

$A2.394 / 0.0625 = $A38.30 or in NZ dollar terms

$A38.30 / 0.95 = $NZ40.32

Current share price on the NZX when I started this exercise was $NZ31.40, which is 22% below my 'comfortable valuation'. This result tells me that WBC is currently underpriced.

From an investor perspective, I like to buy at below fair value. So what if I was in the market to buy some more WBC? For a quasi-utility type investment this means a 20% discount to fair value, a price of $NZ32.26 for WBC.NZX shares. With current NZX listed price below this, it looks like WBC is a 'buy' on the market today, at least from an Australian perspective.

SNOOPY

[Snoopy]

Divide 'return' by 'the yield' and you get the share price that I would feel comfortable paying:

$A1.79.1 / 0.065 = $A27.55 or in NZ dollar terms

$A27.55 / 0.95 = $NZ29.00

Current share price on the NZX as I write this is $NZ31.40, which is 8.2% above my 'comfortable valuation'. So this means I should sell down, or does it?




So my answer to the question I posed is 6.5%. From an Australian perspective though, I get a slightly different answer. The New Zealand Official cash rate is 1.75%. The Australian Official Cash Rate is 1.5%. To reflect this difference, I am reducing the yield I require from WBC by the difference in those two figures, 0.25%. This means the new yield I am happy with is 6.25%

Divide 'return' by 'the yield' and you get the share price that I would feel comfortable paying:

$A2.394 / 0.0625 = $A38.30 or in NZ dollar terms

$A38.30 / 0.95 = $NZ40.32

Current share price on the NZX when I started this exercise was $NZ31.40, which is 22% below my 'comfortable valuation'. This result tells me that WBC is currently underpriced.

From an investor perspective, I like to buy at below fair value. So what if I was in the market to buy some more WBC? For a quasi-utility type investment this means a 20% discount to fair value, a price of $NZ32.26 for WBC.NZX shares. With current NZX listed price below this, it looks like WBC is a 'buy' on the market today, at least from an Australian perspective.


Here we have an example of the true value of tax credits to the NZ based investor. In this instance, WBC is not entirely devoid of NZ imputation credits. Yet the lack of access to Australian franking credits for NZ investors is enough to turn this investment from a 'buy' to a 'hold/sell'. The Oz banks have a long record of capital growth as well as being good dividend payers. Yet there are indicators out there that this long history of capital growth may be coming to an end. So what to do?

SNOOPY

[percy]

Surely you know the answer without asking?

[Snoopy]

Surely you know the answer without asking?


I think the answer depends on what you are after and your circumstances.

1/ If as an NZ investor, you are after a fully imputed dividend yield then you might look elsewhere. Heartland will give you that higher gross yield. The problem is I value Heartland at $1.42 (long term business cycle average). At $1.76 trading on the market today, that makes Heartland overvalued by 24%. OTOH Westpac is currently trading at $31.65 which is 9% over my 'NZ Investor' valuation of $29.00. So both are overvalued from an NZ perspective, but Westpac less so. So I would be tempted to buy neither, but put WBC on my watch list and see what happens with the price.

2/ If you take the Oz market perspective and regard the price as 'beaten down', then now looks to be a good time to buy for a recovery. The problem is, how much 'historical growth premium' is built into the WBC share price? I am forecasting a small drop in dividend yield in my modelling ($1.68 annual dividend average going forwards, a drop from last year's $1.88). I reckon even this reduced dividend justifies the $A38.30 share price. So I don't see much medium term risk here. Buy for the dividend and maybe even some share price recovery in this circumstance.

SNOOPY

[Snoopy]

2/ If you take the Oz market perspective and regard the price as 'beaten down', then now looks to be a good time to buy for a recovery. The problem is, how much 'historical growth premium' is built into the WBC share price? I am forecasting a small drop in dividend yield in my modelling ($1.68 annual dividend average going forwards, a drop from last year's $1.88). I reckon even this reduced dividend justifies the $A38.30 share price. So I don't see much medium term risk here. Buy for the dividend and maybe even some share price recovery in this circumstance.


Old, but nevertheless relevant news from the back of the AFR of June 6th and the article "Bad debts will amplify Bank tax"

-----

On Monday (5th June) the gross yield for Westpac Banking Corporation was in excess of 9%. After being asked about these juicy yields, one fund manager who owns zero bank stocks said

"A lot of people look at the yields of the banks relative to the cash rate of 1.5%. Sure it is a relatively big number. But it is all about the quality of the yield." "The market feels that these bank stock yields are unsustainable."


<snip>

Westpac Banking Corp., which is respected amongst its peers for the quality of its credit management provides some useful numbers. The best ratio for measuring impairments is impairment charges to gross loans and advances. This is expressed in basis points.

In year to September 30 2007, when good times were prevailing in Australian banking, Westpac's impairment charge was 19 basis points. It rose to 32 basis points in 2008 and hit 75 basis points in 2009. That was the highest level experienced by Westpac since its near death experience in the early 1990s. In the half year to March this year , Westpac's impairment charge rose 1 basis point to 15 basis points. That tells you the bank is experiencing very benign credit conditions.

<snip>

It would not be unreasonable for investors in bank stocks to assume that the bad and doubtful charge will over the next five years rise to about 30 basis points. That would be a reversion to the mean which is a typical occurrence in financial and commodity markets.

<snip>

Australia's major banks have recently enjoyed the most benign asset quality conditions seen in the industry for about a decade. This cannot continue indefinitely. The prospect of an end to 26 years of uninterrupted economic growth in Australia will put a different complexion on Morrison's bank tax (0.6% on the value of bank loans to customers) . It could well be the catalyst for lower dividends and another round of capital calls on bank shareholders.

------


SNOOPY

[Lewylewylewy]

Getting close to my buy in price of $28. I can't see how the banks would be a bad bet, given that the banks put up their rates above the rate of increase of interest rates, and this would more than cover the new levi's, which aren't actually that bad on the books.

[Joshuatree]

South Australia takes on the nation's banks with new tax (https://www.google.co.nz/url?sa=t&rct=j&q=&esrc=s&source=web&cd=1&cad=rja&uact=8&ved=0ahUKEwjYkJ3xmdPUAhXImJQKHWSrDOAQqUMIJzAA&url=http%3A%2F%2Fwww.smh.com.au%2Fbusiness%2Fbanki ng-and-finance%2Fsouth-australia-takes-on-the-nations-banks-with-new-tax-20170622-gwwhzq.html&usg=AFQjCNEjgYfUxwD3YQDaNfmlN9376KS2Dg)

[percy]

Looks to me as though the woman stting next to the guy speaking is trying to work out how much extra a week her mortgage repayments will be,and does not like the answer.!
Better get a REL mortgage from a friendly NZ bank.!!..lol.
Gee whiz the Aussie know how to shoot themselves in the foot.
Aussie politicans are in a world of their own.

[JBmurc]

Got a few loans with WP hoping they will be cutting me another sharp deal come end of fixed term in JULY

[RTM]

https://www.anzsecurities.co.nz/DirectTrade/dynamic/quote.aspx?qqsc=WBC&qqe=NZSE&view=news
Trading halt.
Wonder what this is about ?

[winner69]

https://www.anzsecurities.co.nz/DirectTrade/dynamic/quote.aspx?qqsc=WBC&qqe=NZSE&view=news
Trading halt.
Wonder what this is about ?

All Aussie banks go into a trading halt in nz pre results announcement ....time difference

[Filthy]

https://www.westpac.com.au/about-westpac/investor-centre/financial-information/financial-calendar/

due to report today mate

[RTM]

Duh....ok...thanks all.

[macduffy]

https://www.westpac.com.au/about-westpac/investor-centre/financial-information/financial-calendar/

due to report today mate

And here it is.

https://www.asx.com.au/asxpdf/20180507/pdf/43ttl4dk9jxtx4.pdf

[visionary]

Hi all, I apologise if this issue has been raised, and covered elsewhere.

I have an outstanding dividend payment, holding shares of WBC:AU on the ASX.

Link services only seem to allow bank transfer to Australian bank accounts - no cheques, no NZ bank accounts. At this stage, my dividend is in limbo, the shares are under company name which means opening an Australian Bank account would be very complicated for taxation. All other organisations I am a shareholder of issue either non-transferable cheques, or allow transfer to NZ based bank accounts bearing the same name as the shareholder.

I have tried writing to Westpac, they obviously value their shareholders so rigorously that 3 days have passed and I have not had a response to my query on how to extract my dividend.

Has anyone else had this issue, and how have they worked around it?

[macduffy]

Can't help with the "stranded" divvy but it might be an idea to transfer the shares to the NZ register, if you intend to keep them.

[Scrunch]

I'm not sure how much help it is but I've got some WBC shares with one holding on the asx and the other on the nzx. Both pay to the same cheque account in nz so it's possible to get the Australian listing paying to a nzd cheque.

Regarding your missing cheque you will probably need to complete and sign a missing / stale cheque from and possibly chase it up until paid.

[visionary]

Thank you for your advice MacDuffy, I will take this into consideration and look into what is involved.

Scrunch, thank you for letting me know it is possible. I will go into the Link Services office when I am up in Auckland in a few weeks and sort this out. The Link Services website (AU) is where the shares show, and it only offers the option of an Australian Bank account for dividend payments.

No cheque has been sent out and certainly nothing rec'd as far as I am aware. I suspect after reading your response, it is a limitation of the Link Service AU website, rather than a limitation of the organisation itself.

The Westpac AU website itself confirms it should be possible for dividend payments into AU, NZ bank accounts, cheque, or reinvestment options on div payments.

Thank you for your help everyone, invaluable and have saved me from not quite knowing who to chase on this.

[Lewylewylewy]

These are back in buying range again.

[peat]

hit hard today. within a whisker of multi-year lows, massive resistance at $30 now.
I agree its actually looking value, but so so weak technically.

[Lewylewylewy]

The interim royal report didn't have a nice sound to it, there's risk of a poor year end from fines. But they'll wrap that up and the following year will be ok.

Im hoping the sp will drop so i can get a bargain.

Im not worried.

[Lewylewylewy]

Also, i read on motley fool (meh) that wbc in oz are recalling high lvr mortgages.

[Scrunch]

Also, i read on motley fool (meh) that wbc in oz are recalling high lvr mortgages.

WBC back down to A$26.45 / NZ$29.00 which I think is the lowest since late 2012/early 2013. PE's heading back into the 10's unless earnings go down.

[Lewylewylewy]

They'll be $28 after the dividend if the current price holds. I can't see them going below $26 on the royal commission results. It'll be great buying at some point (double your money in a year type stuff), but until then im happy with my current strategy: buy below $30, sell above when its in profit. Enjoy the dividend if it takes a while to get back into profit.

[Mickey]

They'll be $28 after the dividend if the current price holds. I can't see them going below $26 on the royal commission results. It'll be great buying at some point (double your money in a year type stuff), but until then im happy with my current strategy: buy below $30, sell above when its in profit. Enjoy the dividend if it takes a while to get back into profit.

I decided to buy in last week when they dropped below $30. At current price they represent a >7% dividend yield if they maintain previous dividend rates. Will look to add to my position on further dips.

[percy]

I decided to buy in last week when they dropped below $30. At current price they represent a >7% dividend yield if they maintain previous dividend rates. Will look to add to my position on further dips.

I think your strategy will be very rewarding.

[Lewylewylewy]

I dont think wbc is a buy and hold, personally. Because they are large enough to have not much room for growth. Also from a technology perspective theyre not very innovative. Though notably they're bringing out wearable chips. Large financial services tend to think up ways to trick or rob people out of their money instead of having a real growth strategy, until an ombudsman comes along or a royal commission lol

[traineeinvestor]

I dont think wbc is a buy and hold, personally. Because they are large enough to have not much room for growth. Also from a technology perspective theyre not very innovative. Though notably they're bringing out wearable chips. Large financial services tend to think up ways to trick or rob people out of their money instead of having a real growth strategy, until an ombudsman comes along or a royal commission lol

Personally, I love banks and the services they provide. A safe place to keep my money, ease of payments for the things I buy, interest on idle cash and, above all, a willingness to lend me money for my investments. I would not have been able to retire as early as I did without them.

As for WBC, looking back, it's been a good company to hold over many years - I've long since had my investment back in tax-free dividends. Looking forward, I agree that it's hard to see WBC (or any large bank in developed markets) delivering above GDP levels of growth over the longer term but at current prices I'm still happy to hold for the dividend yield.

[Scrunch]

Personally, I love banks and the services they provide. A safe place to keep my money, ease of payments for the things I buy, interest on idle cash and, above all, a willingness to lend me money for my investments. I would not have been able to retire as early as I did without them.

As for WBC, looking back, it's been a good company to hold over many years - I've long since had my investment back in tax-free dividends. Looking forward, I agree that it's hard to see WBC (or any large bank in developed markets) delivering above GDP levels of growth over the longer term but at current prices I'm still happy to hold for the dividend yield.

Realistically you could add inflation to GDP from an expected capital growth perspective taking potential returns past 10% pa on current prices and sensible gdp/inflation estimates.

There is however downside risk while the current negative trend exists.

[peat]

problem with banks is how quickly some of those assets need to get provided for as 'poor performers' and written off. With such enormous leverage when things go bad they really go bad.
But I agree that the yield is looking really attractive under $30. and it is hard to see them failing though worst case scenario it is possible.

[Mickey]

.......As for WBC, looking back, it's been a good company to hold over many years - I've long since had my investment back in tax-free dividends.......

Curious - how are they tax free dividends?

[traineeinvestor]

Curious - how are they tax free dividends?

I hold on the Australian share register where full franking credits means no non-resident withholding tax is deducted when dividends are paid + I live in Hong Kong where dividends are not taxed (a simplified approach to the principle of no double taxation).

[traineeinvestor]

Realistically you could add inflation to GDP from an expected capital growth perspective taking potential returns past 10% pa on current prices and sensible gdp/inflation estimates.

There is however downside risk while the current negative trend exists.

If I could get 10% pa after tax notional returns in an environment where inflation is around 3%, I'd be queuing up all day long to buy.

[Mickey]

I've not owned WBC before and notice that even though I bought these on the NZX, the dividend is paid in Australian dollars. I'm assuming that no NZ tax is deducted so I'd be grateful if somebody who is holding these could advise what I need to do to satisfy NZ tax obligations. Thanks.

[Snoopy]

I've not owned WBC before and notice that even though I bought these on the NZX, the dividend is paid in Australian dollars. I'm assuming that no NZ tax is deducted


You assume incorrectly. Westpac dividends have had associated NZ imputation credits (to a limited degree) for several years now. You can claim these imputation credits as tax paid in New Zealand on your New Zealand income. However these imputation credits are not paid to 28% and are insufficient to extinguish your NZ tax obligations on the whole Westpac dividend.



so I'd be grateful if somebody who is holding these could advise what I need to do to satisfy NZ tax obligations. Thanks.


As an NZ taxpayer you are not allowed to claim Australian Franking Credits. So when you get your dividend statement and it shows your Net Income in Australia (with franking credits deducted) then this becomes your Gross Income in New Zealand. Enter this gross income you get from Australia alongside any associated Aussie withholding tax paid if any (which perversely you are allowed to claim as tax paid for NZ purposes) in your 'overseas income' section of your NZ tax return.

SNOOPY

discl: WBC shareholder on the NZ Register.

[Mickey]

You assume incorrectly. Westpac dividends have had associated NZ imputation credits (to a limited degree) for several years now. You can claim these imputation credits as tax paid in New Zealand on your New Zealand income. However these imputation credits are not paid to 28% and are insufficient to extinguish your NZ tax obligations on the whole Westpac dividend.



As an NZ taxpayer you are not allowed to claim Australian Franking Credits. So when you get your dividend statement and it shows your Net Income in Australia (with franking credits deducted) then this becomes your Gross Income in New Zealand. Enter this gross income you get from Australia alongside any associated Aussie withholding tax paid if any (which perversely you are allowed to claim as tax paid for NZ purposes) in your 'overseas income' section of your NZ tax return.

SNOOPY

discl: WBC shareholder on the NZ Register.

Thanks very much for your response Snoopy and for providing such clarity. Much appreciated :-)

[dabsman]

I nearly spat out my lunch - WBC up 220c this morning and a divvy to come end of June - lovely

[winner69]

I nearly spat out my lunch - WBC up 220c this morning and a divvy to come end of June - lovely

The ScoMo magic ....good eh

[peat]

bit of a smack down for Craigs this rise today , they just hated on Aussie Banks ,

[Joshuatree]

3 years of opinion polls got it wrong ,
Big four all up to 6% plus today. Election result and franking credits staying may be the reason

[Sgt Pepper]

The ScoMo magic ....good eh

Indeed, Westpacs USA shareholders (they account for 58% of the shares)will be very happy. I wonder whats happened to the rumour of ANZ floating shares in NZ as a response to the Reserve Bank proposal to require higher reserve ratio??
Might be good if Westpac start payiing their staff better. I talked to one and it didnt sound like a very pleasant place to work. It would good if a brave shareholder could hold them to account

[Grimy]

Pleased to have bought some of these (and ANZ on the dip) late last week. Used some of my ASBPB proceeds. For once my timing was lucky.

[dabsman]

Sort of sounds ungrateful but I wish this run was after the DRP calculation period! My best performing share this financial year

[bottomfeeder]

Had quite a few of these at the 2680 and 2700 mark, and also bought some more after it went ex div. I thought these would be a good long term hold. Cant beat the return, when interest rates are so low. You could have blown me over when the price surged, I wasnt expecting that.

I cant see all of the banks problems are over yet. Long story made short, I sold them all and took the profit.

My question to consider is will they go back down to 2680. I am desperate to get back in but at what price.

[tim23]

Anyone else having an issue accessing SPP offer website?

[Scrunch]

What are the best solutions NZ based traders have found to making AUD BPAY based payments?

Westpac's SSP at A$25.32 looks like paying by BPAY will be the most effective, and also the lowest chance of something going missing - I don't like posting, or even using a courier for large cheques hoping they get there!!

I've recently shifted to banking with HSBC and am considering opening an AUD account with them. I'm however unsure if an AUD account through the multi-currency element of the NZ platform of HSBC will enable BPAY payments. Do I need to go one step further and open a HSBC account through the Australian element of HSBC that would then obviously have BPAY enabled?

Anyone else been through this loop to know what works?

[kiwico]

What are the best solutions NZ based traders have found to making AUD BPAY based payments?

Westpac's SSP at A$25.32 looks like paying by BPAY will be the most effective, and also the lowest chance of something going missing - I don't like posting, or even using a courier for large cheques hoping they get there!!

I've recently shifted to banking with HSBC and am considering opening an AUD account with them. I'm however unsure if an AUD account through the multi-currency element of the NZ platform of HSBC will enable BPAY payments. Do I need to go one step further and open a HSBC account through the Australian element of HSBC that would then obviously have BPAY enabled?

Anyone else been through this loop to know what works?

I have an AUD account with HSBC and it appears to be very dormant as in little ability to do anything other than to hold AUD.

I have found the best way to deal with Australian shares has been to open up a NAB bank account and corresponding NABTrade share account when on holiday in Australia. It's cheaper to buy ASX shares and there's an AUD bank account for the AUD dividends and you get access to BPAY. It was very easy to open and very easy to operate online. Both are highly recommended.

[Scrunch]

I have an AUD account with HSBC and it appears to be very dormant as in little ability to do anything other than to hold AUD.

I have found the best way to deal with Australian shares has been to open up a NAB bank account and corresponding NABTrade share account when on holiday in Australia. It's cheaper to buy ASX shares and there's an AUD bank account for the AUD dividends and you get access to BPAY. It was very easy to open and very easy to operate online. Both are highly recommended.

Thank you. I'll need to do something like that next time I'm over the there.

[airedale]

I have been accumulating WBC shares through the NZX and with NZ$. It looks if I take up my entitlement in the offer then I must buy on the ASX register with AU$. Maybe I have to buy on the NZX for the NZ listing. Anyone else with a similar dilemma?

[Grimy]

I have been accumulating WBC shares through the NZX and with NZ$.
Same here.
I haven't looked very hard as I probably won't participate, but I think there is a NZ phone number you can call which would hopefully make things clearer.

[Scrunch]

I have been accumulating WBC shares through the NZX and with NZ$. It looks if I take up my entitlement in the offer then I must buy on the ASX register with AU$. Maybe I have to buy on the NZX for the NZ listing. Anyone else with a similar dilemma?

While I haven't done it, I believe you can shunt shareholding between the nz and oz registers. You will still need to pay AUD for the shares but after shunting them could sell in the NZX with NZD settlement.

[Joshuatree]

FWIW my broker is reccoing not taking up the offer, outlook and margins for the big banks coming under pressure.

[airedale]

Hi Josh, I am reminded of a quote from Jesse livermore "if you buy on Smith,s tip, then you should sell on Smith,s tip.
My Mr Smith has buy tip on WBC . But thanks for your tip.😊

[Jim]

I have been accumulating WBC shares through the NZX and with NZ$. It looks if I take up my entitlement in the offer then I must buy on the ASX register with AU$. Maybe I have to buy on the NZX for the NZ listing. Anyone else with a similar dilemma?


Direct broking will do it for you by BPay if you have an account with them but make sure you have enough funds in your account. I had the same problem last time when AMP offered me to subscribe for extra shares few months ago by BPay

[airedale]

While I haven't done it, I believe you can shunt shareholding between the nz and oz registers. You will still need to pay AUD for the shares but after shunting them could sell in the NZX with NZD settlement.

Looks like your right Scrunch, I rang the SPP help line and using the personalised SPP application form, send that to your broker and he takes the money from your OZ$ trading account.

[airedale]

Further thoughts: Colin Twiggs estimates that the major Australian banks are over on average over valued by 16.5%. Taking Friday's closing SP of Au $26.63 minus 16.5% =Au $ 26.19. That indicates that the SPP price of Au$ 25.32 is at $0.87 discount to fair value.

[macduffy]

Not sure of your maths there, airedale. 16.5% of $26.63 equals $22.23.

[ratkin]

What are the best solutions NZ based traders have found to making AUD BPAY based payments?

Westpac's SSP at A$25.32 looks like paying by BPAY will be the most effective, and also the lowest chance of something going missing - I don't like posting, or even using a courier for large cheques hoping they get there!!

I've recently shifted to banking with HSBC and am considering opening an AUD account with them. I'm however unsure if an AUD account through the multi-currency element of the NZ platform of HSBC will enable BPAY payments. Do I need to go one step further and open a HSBC account through the Australian element of HSBC that would then obviously have BPAY enabled?

Anyone else been through this loop to know what works?

do not know about HSBC but it is very easy with ASB securities, just have to email throug any documents you want paying by bpay and the ASB broker puts it through from your cash management account

[airedale]

You are correct mac. I must change the battery in my slide rule.

[Bobdn]

https://www.smh.com.au/business/companies/westpac-accused-of-large-scale-breaches-by-money-laundering-watchdog-20191120-p53c8o.html

Share price rapidly heading closer to $25.32 AUD. At least people don't have to fret if they miss out on their allocation from the share purchase plan - might end up cheaper buying off market.

This happened with the ANZ capital raise a few years back. I missed on my allocation of shares because I wrote a NZ cheque for what I thought was NZ shares. I think the price on offer was round $29? Can't recall. Next minute, the share price was down to $24. Being a bit slow definitely has its advantages. Sometimes the best course of action is to stand still and do nothing.

I use to feel envious about the smart money getting first dibs on this sort of stuff but not anymore.

[Joshuatree]

Hi Josh, I am reminded of a quote from Jesse livermore "if you buy on Smith,s tip, then you should sell on Smith,s tip.
My Mr Smith has buy tip on WBC . But thanks for your tip.

Try a few years then,

[airedale]

Thanks Josh, the facts have changed so I am able to change my mind. I was lucky enough to sell my holding yesterday intending to buy back in at the SPP. I will let the dust settle before my next move. Perhaps in a few years🤔

[Bobdn]

And there she blows, you can get your WBC shares now at a significant discount to the SPP price.

This article raises an interesting point about the institutions that have already tipped in billions to hoover up the "cheap" shares though the SPP. I wonder if they will ask for their money back?

https://au.finance.yahoo.com/news/austrac-case-against-westpac-threatens-222812694.html

[limmy]

And there she blows, you can get your WBC shares now at a significant discount to the SPP price.

This article raises an interesting point about the institutions that have already tipped in billions to hoover up the "cheap" shares though the SPP. I wonder if they will ask for their money back?

https://au.finance.yahoo.com/news/austrac-case-against-westpac-threatens-222812694.html
Good article, thanks for sharing.

[percy]

I note WBC's share price is back to where it was 10 years ago.

[peat]

big cleanout today. They do seem to be taking the issues raised seriously
Or am I being naive.
But seriously, does anyone think this will affect profitability in the medium term.
Hard to slow down a juggernaut

[percy]

A lot more shares on issue will affect ratios.
Could see all the extra capital raised paying a fine.
It will be an incredible fine running into billions.
Then WBC will need to come back for more capital,which will lead to more shares being issued ,and ratios again being affected.
Note WBC's [nz] share price is lower today than it was 10 years ago.
Take care.

[RTM]

big cleanout today. They do seem to be taking the issues raised seriously
Or am I being naive.
But seriously, does anyone think this will affect profitability in the medium term.
Hard to slow down a juggernaut

Yes....a bit of a different response compared to Prince Andrews......yes I know....not really apples with apples.

[macduffy]

ABC"s comment:

https://www.abc.net.au/news/2019-11-26/westpac-is-now-the-main-banking-horror-story-austrac-allegations/11738642

I take your point, percy, but confess that I'm tempted. Remember Westpac's lending crisis of the late 80's/early 90's when they were forced into a heavily discounted rights issue? Fortunes were made then...…….

[winner69]

There was a $16 cap raise in 2009 during GFC

[Beagle]

https://www.marketscreener.com/WESTPAC-BANKING-CORPORATI-6492063/financials/
Forward FY20 PE is 12.7.

Not sure why anyone would want to go there ??? with HGH who don't have all these issues on a forward PE of just 12.2 by comparison.

[percy]

ABC"s comment:

https://www.abc.net.au/news/2019-11-26/westpac-is-now-the-main-banking-horror-story-austrac-allegations/11738642

I take your point, percy, but confess that I'm tempted. Remember Westpac's lending crisis of the late 80's/early 90's when they were forced into a heavily discounted rights issue? Fortunes were made then...…….

A good friend did well out of that rights issue, and is preparing to front up to this one.Like you he has a good memory.
He is not talking to me, since I told him I thought he should buy more PAZ rather than WBC..!!.....lol.

[Snoopy]

ABC"s comment:

https://www.abc.net.au/news/2019-11-26/westpac-is-now-the-main-banking-horror-story-austrac-allegations/11738642

I take your point, percy, but confess that I'm tempted. Remember Westpac's lending crisis of the late 80's/early 90's when they were forced into a heavily discounted rights issue? Fortunes were made then...…….


I am ashamed to say I am a Westpac shareholder, who has taken his eye off the ball. I have to admit that most of my investment energy is expended on the NZX and my other holdings tend to be 'buy and hold' investments representing sectors I cannot invest in via the NZX. But I guess that is no real excuse.

'The bank that may have facilitated pedophiles'

doesn't sound like a great marketing campaign line.

AUSTRAC (The Australian Transaction Reports and Analysis Centre) is investigating and

"Any enforcement action against Westpac may include civil penalty proceedings and result in the payment of a significant financial penalty which Westpac is currently unable to reliable estimate." (AR2019 p255)

But perhaps even more damaging financially and reputationally is the less headline grabbing legal issues that relate to the way that Westpac's own initiated business practices permeate their core business. Westpac disclose the 'live legal cases' they now face in AR2019, p255 to p256:

1/ ASIC (Australian Securities and Investigation Commission) March 2017 case against contraventions of the 'National Consumer Credit Protection Act'. against certain interest only home loans. The case has been dismissed on 13-08-2019 but ASIC has appealed. No provision has been recognised in WBC accounts in relation to this matter.

2/ ASIC December 2016 case against personal advice given in contravention of a number of Corporation Act 2001 provisions, largely in relation to the consolidation of Superannuation accounts at 'BT Funds Management Limited' and 'Westpac Securities Administration Limited'. On 28-10-2018 the Full Federal Court ruled in ASICs favour. The matter has yet to be remitted for penalty. No provision has been recognised in WBC accounts in relation to this matter.

3/ ASIC August 2016 case filed in the United States against Westpac and other international banks alleging misconduct in relation to the bank bill swap reference rate. The original case was dismissed on a technicality, but it was refiled in revised form in May 2019. No provision has been recognised in WBC accounts in relation to this matter.

4/ An October 2017 class action was filed in the Supreme Court of Australia against Westpac and Westpac Life Insurance alleging advisors breached their fiduciary duties by not acting in the best interests of their clients. These actions are currently stayed by the courts as a result of a procedural matter. No provision has been recognised in WBC accounts in relation to this matter.

5/ A February 2019 class action was filed against Westpac, claiming that Westpac did not comply with responsible lending obligations for certain home loans that it should have assessed as unsuitable. No provision has been recognised in WBC accounts in relation to this matter.

6/ A September 2019 class action against 'BT Funds Management Limited' (BTFM) and 'Westpac Life Insurance Services' (knowingly concerned with the former). It is alleged that BTFM charged excessive fees and mismanaged investments. No provision has been recognised in WBC accounts in relation to this matter.

Note that the common thread amongst all of these court cases is that no specific provision has been made for any of them! This is not because Westpac believes they have no chance of succeeding. Item 2 has already been lost after all. It is because estimating any consequent losses is too difficult.

I wonder if, nevertheless, the recent capital raising was an attempt to provide some provisioning against all of this, albeit in an as yet unformalised and unallocated way?

SNOOPY

[Snoopy]

Note that the common thread amongst all of these court cases is that no specific provision has been made for any of them! This is not because Westpac believes they have no chance of succeeding. Item 2 has already been lost after all. It is because estimating any consequent losses is too difficult.


Having said Westpac have shied away from estimating some serious legal downside costs, I noticed one area of small print where they have put their hand up. From p257 AR2019

"The Financial Claims Scheme (ADIs) Levy Act 2008 provides for the implementation of a levy to fund the excess of certain APRA FCS costs connected to an ADI (Authorised Deposit taking Instituition) including payments by APRA to deposit holders in a failed ADI. The levy would be imposed on liabilities of eligible ADIs to their depositors and cannot be more than 0.5% of the amount of these liabilities."

This money will go into a pot that will guarantee bank depositors in approved ADIs up to $250,000 worth of their deposits back (significantly better than the $50,000 ceiling guaranteed in NZ I note), should their ADI get into trouble.

Now for those that get confused by 'banker speak', it is we depositors when we stick our money in the bank that create this kind of bank liability. So it is we depositors who ostensibly fund this, even though it is up to the bank to collect this money from us.

The paragraph ends

"A contingent liability may exist in respect of any levy imposed under the Financial Claims Scheme."

This implies that this levy, despite being legislated for, has not been collected. But if the Federal Government wanted to collect this levy, how much would Westpac have to pay annually? If we take the amount of money in the Australian arm of the business from customer deposits as a guide, then I calculate an annual levy of up to:

0.5% x $464,254m = $2,321m per year

Yes that is right. $A2.3 billion each and every year as a levy (c.f. cash profit for FY2019 of $6.849billion) ! If ever there was a hidden sword of damocles hanging over the Westpac business model, this must be it. But will the Federal government ever implement a levy as draconian as this? And will such a levy in implemented be an annual charge or a one off?

SNOOPY

[peat]

i dont quite see how you can associate the banker with the crime. Sure they broke AML laws but they didnt do pedo.
Are reserve banks (issuers of coin and notes) responsible for drug deals that go on with their cash. ?

[Snoopy]

i dont quite see how you can associate the banker with the crime. Sure they broke AML laws but they didnt do pedo.
Are reserve banks (issuers of coin and notes) responsible for drug deals that go on with their cash. ?


Bankers know a lot about their customers and their spending habits. Some say they can identify if your bankcard and security code is stolen by flagging as few as two to three transactions. Banks also have anti-money laundering responsibilities and are required to look out for proceeds of crime. I guess some banks take their responsibilities more seriously than other banks. It appears only Westpac facilitate the funding of Pedophile rings on a large scale. Other banks put Children above profit. I wonder if Ron Brierley banks with Westpac?

SNOOPY

[dabsman]

Bankers cant - algorithms can. A banker cant tell if 10,000 pesos is send to pay for abuse or to help a partners family back in the Philippines. AML doesnt help either to be fair

[Snoopy]

"A contingent liability may exist in respect of any levy imposed under the Financial Claims Scheme."

This implies that this levy, despite being legislated for, has not been collected. But if the Federal Government wanted to collect this levy, how much would Westpac have to pay annually? If we take the amount of money in the Australian arm of the business from customer deposits as a guide, then I calculate an annual levy of up to:

0.5% x $464,254m = $2,321m per year

Yes that is right. $A2.3 billion each and every year as a levy (c.f. cash profit for FY2019 of $6.849billion) ! If ever there was a hidden sword of damocles hanging over the Westpac business model, this must be it. But will the Federal government ever implement a levy as draconian as this? And will such a levy in implemented be an annual charge or a one off?


A bit more on this 'Financial Claims Scheme' they have in Australia

https://www.apra.gov.au/financial-claims-scheme-protecting-depositors-and-policyholders

From the above link:

-------

How is the scheme funded?

If the Government activates the FCS, initial FCS funding will be provided by the Government in order to facilitate timely payments to account holders.

Amounts paid under the FCS and associated administration costs would then be recovered through the liquidation process through a priority claim. Any shortfalls through the liquidation would subsequently be recovered by the Government through an industry special levy.

------

It does look like this levy is an 'after the event' procedure. If an Approved Deposit taking Institution was liquidated, then:

1/ Government pays out deposit holders. (Up to $250k under the one banking licence in trouble).
2/ Government liquidates the ADI to recover its money.
3/ Government imposes an industry levy to recover any shortfall.

So this FCS levy that might be applied to Westpac would be to pay out depositors from another industry player that has been liquidated. As Westpac shareholders, this is outside our control unless of course it is Westpac itself that end up in liquidation. But as Westpac shareholders, we will already be 'down the dunny' by that stage: no 'levy' to worry about!

SNOOPY

[Snoopy]

Note that the common thread amongst all of these court cases is that no specific provision has been made for any of them! This is not because Westpac believes they have no chance of succeeding. <snip> It is because estimating any consequent losses is too difficult.

I wonder if, nevertheless, the recent capital raising was an attempt to provide some provisioning against all of this, albeit in an as yet unformalised and unallocated way?


I have done a bit more homework on this topic.

From AR2019 p84, the 'non-interest income' decrease year on year is explained.

There was a "$657 million decrease from provisions for estimated customer refunds , payments, associated costs and litigation."

So although there is no specific provision for the avalanche of court cases pending against Westpac, there is $657m available already to make litigation related payments.

Specifically for Wealth Management and Insurance we learn that a separate $531m has been set aside as

"...additional provisions for estimated customer refunds, payments , associated costs, and litigation (mostly related to financial planning)."

That all adds up to a reduction in non interest income for FY2019 of:

$657m + $531m = $1,188m

Separate to all of this, there has been much scrutiny of the payment of senior managers including the CEO. From AR2019 p56:

"Cash earnings were also impacted by provisions for estimated customer refunds, payments associated costs and litigation, as well as costs associated with the restructuring of the Wealth business. Excluding the impact of these items Westpac's cash earnings were $7,979m."

From AR2019 p2 the declared cash earnings for FY2019 were $6,849m. The difference in these two figures indicates the one off provisioning against the now largely discontinued wealth business.

$7,979m - $6,849m = $1,130m

This is $58m less than the total restructuring costs I calculated above. My explanation for this discrepancy is that, of the $531m set aside against 'Wealth Management and Insurance', $58m must have been for the continuing 'Insurance' side of 'Wealth Management and Insurance'.

It may end up not being enough. But $657m + $473m = $1.130 billion set aside over the last financial year to address these remediation and litigation issues is a significant start. More detailed information of how that $1,130m was accounted for over FY2019 may be found in AR2019 p95.

SNOOPY

[peat]

so theres a whole yard set aside then Snoopy!
already! even when making those billions of profit every year. Wow what a fantastic business it must be!

[Snoopy]

A bit more on this 'Financial Claims Scheme' they have in Australia

https://www.apra.gov.au/financial-claims-scheme-protecting-depositors-and-policyholders

From the above link:

-------

How is the scheme funded?

If the Government activates the FCS, initial FCS funding will be provided by the Government in order to facilitate timely payments to account holders.

Amounts paid under the FCS and associated administration costs would then be recovered through the liquidation process through a priority claim. Any shortfalls through the liquidation would subsequently be recovered by the Government through an industry special levy.

------

It does look like this levy is an 'after the event' procedure. If an Approved Deposit taking Institution was liquidated, then:

1/ Government pays out deposit holders. (Up to $250k under the one banking licence in trouble).
2/ Government liquidates the ADI to recover its money.
3/ Government imposes an industry levy to recover any shortfall.

So this FCS levy that might be applied to Westpac would be to pay out depositors from another industry player that has been liquidated. As Westpac shareholders, this is outside our control unless of course it is Westpac itself that end up in liquidation. But as Westpac shareholders, we will already be 'down the dunny' by that stage: no 'levy' to worry about!


What this exercise has taught me is that if you want to understand something it is best to look at Chapter 1 of the book first, not Chapter 3!

From AR2017 p4, the Chairman's report:

"The bank levy became effective from 1st July 2017."

So I was quite wrong to say it would be applied retrospectively after a crisis. It is being applied right now in advance of any prospective crisis!

Continuing from AR2017 p6

"The Bank levy is now in place but we must continue to agitate for its removal. It is a highly inefficient and distortive tax that places an impost on a small number of Australia's largest taxpayers (ANZ, Commonwealth, NAB, Macquarie and Westpac banks). It discriminates against Australian banks relative to global peers."



"The Financial Claims Scheme (ADIs) Levy Act 2008 provides for the implementation of a levy to fund the excess of certain APRA FCS costs connected to an ADI (Authorised Deposit taking Instituition) including payments by APRA to deposit holders in a failed ADI. The levy would be imposed on liabilities of eligible ADIs to their depositors and cannot be more than 0.5% of the amount of these liabilities."

The paragraph ends

"A contingent liability may exist in respect of any levy imposed under the Financial Claims Scheme."

This implies that this levy, despite being legislated for, has not been collected. But if the Federal Government wanted to collect this levy, how much would Westpac have to pay annually? If we take the amount of money in the Australian arm of the business from customer deposits as a guide, then I calculate an annual levy of up to:

0.5% x $464,254m = $2,321m per year

Yes that is right. $A2.3 billion each and every year as a levy (c.f. cash profit for FY2019 of $6.849billion) ! If ever there was a hidden sword of damocles hanging over the Westpac business model, this must be it. But will the Federal government ever implement a levy as draconian as this? And will such a levy in implemented be an annual charge or a one off.


I reiterate that this bank levy is being collected now. But it is not being levied on retail customer deposits, as I had assumed in my calculation above.

From

https://www.aph.gov.au/About_Parliament/Parliamentary_Departments/Parliamentary_Library/pubs/rp/BudgetReview201718/Banks

"The tax is expected to raise $6.2 billion over the forward estimates or around $1.5 billion annually" (A cumulative total from all five targeted banks).

That would indicate that, barring any ADI failure in the four years following 1st July 2017, the levy may cease to be applied after four years. But perhaps four years marks the end of the planning cycle, rather than the end of the tax? If this is the case, there is no signal that that the bank levy total will be capped

"There is no end date provided for the Bank Levy" (AR2018 p25)

The balance sheet for FY2019 may be found in AR2019 on p138.

Continuing to quote from the website referenced above (and adding my own AR2019 cross references):

"The tax will apply to:

1/ Corporate bonds [All fixed interest investments that Westpac have introduced to the market under their own name appear to be Tier 1 capital]: These are not applicable for the bank levy due to all Westpac (series 2,3,4,5,6 'capital notes') bonds being 'Tier 1' (see below *). However in the 'Balance Sheet' under 'Liabilities' under 'Debt Issues' there is other 'Senior Long Term Debt' listed: From AR2019 p198 Note 18, $109,340m (FY2019) and $103,159m (FY2018). The majority of Westpac 'Senior Long Term Debt' is held in foreign currencies, refer AR2019 p199 (c.f. same total figure on p198).

2/ Commercial paper [Includes Securitized Loans, Covered Bonds or 'Securitized mortgages with extra capital added' and 'Structured Notes' for example borrowings financed by energy savings from the purchase] $46,279m (FY2019), $43,171m (FY2018), from AR2019 p198 Note 18.

I think this category also includes 'Repurchase Agreements' of $10,604m (FY2019) and $9,522m (FY2018) AR2019 p197 Note 17.

3/ Certificates of deposit [Wholesale rather than personal term deposits], $38,731 (FY2019), $41,534m (FY2018) from AR2019 p195 Note 16, AND

4/ Tier 2 capital instruments. ( $12,502m (FY2019), $8,310m (FY2018) from AR2019 p200 Note 19)

(*) It will not apply to

1/ Additional Tier 1 capital and
2/ Customer deposits protected by the Financial Claims Scheme (FCS)."

"A tax of 0.06 per cent will be applied to the liabilities of banks meeting certain size criteria"

While the parent legislation allows for a levy of up to 0.5% of certain deposits, the reality is that the sum charged is 'only' 0.06%. That sounds like the banks have got away lightly. But we are talking about a sum close to $100m per year nevertheless. And the levy is due 'every year'. So to answer my own question, the levy is not a one off. But the amount collected is not as draconian as the underlying legislation allows (just over 1/10th of the maximum in fact).

SNOOPY

[Snoopy]

The tax will apply to:

1/ Corporate bonds [All fixed interest investments that Westpac have introduced to the market under their own name appear to be Tier 1 capital] Not applicable for bank levy due to all Westpac (series 2,3,4,5,6 'capital notes') bonds being 'Tier 1' (see below *). However in the 'Balance Sheet' under 'Liabilities' under 'Debt Issues' there is other 'Senior Long Term Debt' listed: From AR2019 p198 Note 16, $109,340m (FY2019) and $103,159m (FY2018). The majority of Westpac 'Senior Long Term Debt' is held in foreign currencies, refer AR2019 p199.

2/ Commercial paper [Includes Securitized Loans, Covered Bonds or 'Securitized mortgages with extra capital added' and 'Structured Notes' for example borrowings financed by energy savings from the purcahse] $46,279m (FY2019), $43,171m (FY2018), from AR2019 p198 Note 18.

I think this category also includes 'Repurchase Agreements' of $10,604m (FY2019) and $9,522m (FY2018) AR2019 p197 Note 17.

3/ Certificates of deposit [Wholesale rather than personal term deposits], $38,731 (FY2019), $41,534m (FY2018) from AR2019 p195 Note 16, AND

4/ Tier 2 capital instruments. ( $12,502m (FY2019), $8,310m (FY2018) from AR2019 p200 Note 19)

(*) It will not apply to

1/ Additional Tier 1 capital and
2/ Customer deposits protected by the Financial Claims Scheme (FCS)."]


"A tax of 0.06 per cent will be applied to the liabilities of banks meeting certain size criteria"


After much consternation in deciding what liabilities to include and what to leave out, I have reached a point where I am going to have a go at calculating the 'bank levy' that Westpac paid in FY2019. The levy would have been payable on averaged account balances, not what was in each account at the end of the year. I have averaged these balances between EOFY2018 and EOFY2019 to get 'averaged balances'. This answer will almost certainly not be correct, but is the best I can do given the financial disclosures available.

It is interesting to note that in AR2017. the Chairman was vehemently opposed to the bank levy and asked shareholders to keep the pressure up on their MPs to get the tax reversed. Yet in AR2019, I haven't been able to locate even a mention of the tax. Somewhere along the line has it been subsumed into 'other expenses'? But I digress.




EOFY2018EOFY2019
FY2019 AveragedReference



Corporate Bonds
$103,159m$109,340m$106,250m(Senior Debt p198 AR2019)


Commercial Paper
$52,693m$56,883m$54,788m(Repurchase Agreements p197, Covered Bonds, Securitization and Structured Entities p198 AR2019)


Certificates of Deposit
$38,731m$41,534m$40,133m
(Certificates of Deposit p195 AR2019}


Tier 2 Capital Instruments
$8,310m$12,502m$10,406m(Total Tier 2 Loan Capital p200 AR2019)


Total
$211,577m



$211,577m x 0.06/100 = $127m

In the AR2017 'Westpac wail', the Chairman was talking about an annual tax of about $100m. So I judge my bank levy estimate for FY2019 of $127m as 'somewhere in the ball park'. I have yet to find the actual 'bank levy' figure paid over FY2019.

SNOOPY

[Joshuatree]

ABC"s comment:

https://www.abc.net.au/news/2019-11-26/westpac-is-now-the-main-banking-horror-story-austrac-allegations/11738642

I take your point, percy, but confess that I'm tempted. Remember Westpac's lending crisis of the late 80's/early 90's when they were forced into a heavily discounted rights issue? Fortunes were made then...…….

"The SPP Offer was made to approximately 618,300 Eligible Shareholders2, with valid SPP Applications received from approximately 40,900 Eligible Shareholders. Valid SPP Applications received represent a participation rate of approximately 7% of Eligible Shareholders with an average SPP Application amount of around $18,850."

w
We opted out with most.SPP was done at $24.20 current price $25.12.

[Southern Lad]

In the AR2017 'Westpac wail', the Chairman was talking about an annual tax of about $100m. So I judge my bank levy estimate for FY2019 of $127m as 'somewhere in the ball park'. I have yet to find the actual 'bank levy' figure paid over FY2019.

SNOOPY

The Westpac Group Tax Transparency Report for the year ended 30 September 2019 details A$388m of Major Bank Levy paid for FY19 compared with A$377m for FY18. The footnote states these amounts were the cash actually paid for the year, which may be different from the Bank Levy liability for each of FY19 and FY18 however the amounts are consistent y-o-y.

See https://www.westpac.com.au/content/dam/public/wbc/documents/pdf/aw/sustainability/Westpac_Tax_Transparency_Report.pdf

[Snoopy]

The Westpac Group Tax Transparency Report for the year ended 30 September 2019 details A$388m of Major Bank Levy paid for FY19 compared with A$377m for FY18. The footnote states these amounts were the cash actually paid for the year, which may be different from the Bank Levy liability for each of FY19 and FY18 however the amounts are consistent y-o-y.

See https://www.westpac.com.au/content/dam/public/wbc/documents/pdf/aw/sustainability/Westpac_Tax_Transparency_Report.pdf

Thanks for this 'Southern Lad'. I did find a reference to the bank levy in the AR2018 Chairman's address on page 7 which stated:

"The impact of the Bank Levy (which cost an equivalent amount of 8 cents per share) was also considered."

If we use the number of shares in circulation at EOFY2018 then in 'dollar terms' this impact is:

$0.08 x 3,434,796,711 = $275m

That is different to the $377m you quote, although maybe the difference can be explained by the Chairman's use of the word 'impact'. The bank levy is tax deductible. So the 'after tax' impact of a $377m bank levy, based on an Australian corporate 30% tax rate, is:

$377m x 0.7 = $264m

The corporate tax rate in Westpac New Zealand is lower at 28%. So this might explain the difference between my calculated $264m above and $275m. Nevertheless it appears my original calculated estimate of the bank levy, my post 142, from studying the annual report is some way out. This means the government is targeting more bank liabilities with this bank levy than I thought. Your figure of $377m for the bank levy over FY2018 is also confirmed (within rounding error) in the CEO's report, AR2018 p10:

"The Levy cost us $378m this year, $283m higher than 2017".

So where could I have gone wrong? Much of the 'consternation' I referred to in a previous post I list below.

1/ Note 24 of AR2019 gives more details on Westpac's Securitized Loans and Covered Bonds. These loans and associated liabilities and Covered bond and Repurchase Agreement total ($66,651m) does not tally up with that presented in the balance sheet ($56,883m). It could be that the bank levy applies to the Note 24 total, and not the balance sheet total.

2/ I have not considered that the 'Provisions' listed in the balance sheet liabilities that are further broken down in Note 27 are part of the government guarantee. Some of these provisions relate to worker entitlements, in particular leave. Since workers are almost always near the head of the queue to be paid out in the event of a liquidation, I did not consider a government guarantee was required on those payments. Other provisions related to restructuring and impairments on credit commitments. I considered these provisions transient and not indicative of the longer term capital position of the bank. So I didn't count any of this as part of the bank liabilities to be guaranteed.

3/ I didn't consider that any of the 'Derivative Financial Liabilities' were positions that would need to be bailed out. I considered that most of these were taken out to provide certainty of cashflows and would end up being neutral by the time any underlying loan was repaid.

I may have been wrong on those 'executive decisions' I made when considering Westpac's liability position. And I don't think that even if I had included all those extra liabilities it would have been enough to make up the difference. But there you are :-(.

SNOOPY

[Snoopy]

"The SPP Offer was made to approximately 618,300 Eligible Shareholders, with valid SPP Applications received from approximately 40,900 Eligible Shareholders. Valid SPP Applications received represent a participation rate of approximately 7% of Eligible Shareholders with an average SPP Application amount of around $18,850."

We opted out with most.SPP was done at $24.20 current price $25.12.


I opted out as well Joshuatree. My reason for opting out was that I found out that Jarden's, a very respected and broking house in NZ that I do not have a personal relationship with, have told all their managed portfolio clients as of late last year that they should get out of Australian retail banks - period. Note this is not saying gradually reduce your holding below the index benchmark. They have said 'sell the lot'. To me this is very shocking. The couple of Oz banks I have shares in have been portfolio staples for, well, forever really. They have seen me through good times and bad. I have to admit my 'Oz' portfolio has largely been 'set and forget'. So I have decided to look into these banks, starting with Westpac, very closely. I don't expect banking shares to return to their glory days. But I do expect good steady dividends, which I do note that in the case of Westpac have, since late last year, been cut. Yet how much doom and gloom is to follow that has not already been built into the WBC share price? That is the question that I intend to find the answer to!

SNOOPY

[peat]

I think you are right not to write off the Australian banking sector holus bolus. It is huge in terms of economic clout and market cap!
Also there is the cloistered nature of the industry due to it transactional services and also from providing credit which we all know is stimulatory (or not) .
The banks are thus not just service providers but literally pillars of society and are recognised as such.
Hence should be in any portfolio at some level

[Snoopy]

Westpac run a wealth management business where they manage fund based share portfolios on behalf of clients. Despite only holding a minority stake in what used to be a fully owned wealth management subsidiary, BT, BT is still classed as a 'related corporate body' to Westpac (apparently!). Thus if BT make changes to their clients portfolios, then Westpac must report this to the NZX. All these funds will be in trust for clients.


I am attempting to unpick the 'Wealth Management' side of WBC from what is left.

From:

https://www.pendalgroup.com/about/corporate-approach/

We learn that what was "BT Financial Group Australia" , a part of Westpac, is an unrelated business to "BT Investment Management Limited", the listed entity.

I need to 'unpick the wealth business' because:

1/ Westpac have reduced their links to the separately listed wealth management arm "BT Investment Management Limited" (BTIM, now renamed 'Pendal Group') to around 10%, with the expectation that this residual holding will be sold.

2/ Westpac have also disestablished their internal wealth management division "BT Financial Group Australia".

This means historical comparisons are going to be difficult from here on in. Westpac have redone their comparatives for FY2018 and FY2017 to account for this latter change at least. But I want to do the full exercise for FY2016 and FY2015 as well.

So let's get on with this unpicking exercise...

-------------

The following information may be gleaned from the respective annual reports under the note for "Investments in Subsidiaries and Associates."

--------

1/ The separately listed wealth business was first partially floated on 10th December 2007. On that date 40% of "BT Investment Management Ltd" (BTIM) (BTT.AX) was floated to the public. A net gain of $141m, pre tax, was generated on this sale (AR2008 p82/p141).

2/ On 23rd June 2015 Westpac reduced their 60.8% holding in BTIM to 31.0% with an institutional and retail offer. Westpac made a gain in two ways doing this. The gain included a 'realised gain' of the 28% of BTIM sold ($492m) and an 'unrealised gain' of the 31% interest retained ($544m). This resulted in a total pre-tax gain of: $492m + $544m = $1,036m (AR2015 p77/p135/p245).

3/ On 26th May 2017 Westpac sold a further 19% of BTIM (carrying value $471m) reducing their holding to 10% (residual carrying value $242m). The result was a net gain (net of transaction costs before tax) of $279m (AR2017 p139/p227).



Market ValueBook value Profit on Transacction


Shares Sold$630m - $471m =$159m (Gross proceeds on sale of 19% stake)


Shares Retainedadd $375m -$242m
=$133m (Mark to market revaluation of residual stake)


Shares Total $1,005m -$713m



less
($13m)(Former associate profit transferred to profit or loss)


equals
$279m(Total Gain as a Result of BTIM sales)



In the the end of year accounts for FY2017, the remaining 10% of BTIM owned was reclassified from an 'associate' to an 'available for sale security' at a market value of $375m (This is the value of the 'residual stake' at the time of the sale of the other 19%).

4/ In FY2018 there was a $104m write down in the residual value of 'Pendal Group' (p160 AR2018). (Name Change Note: A decade on from the float, following approval from its own shareholders, BT Investment Management Limited (BTIM) changed its own company name to "Pendal Group Limited" (PDL.AX) on 27 April 2018).

The accounting value at EOFY2018 of the 10% residual stake on the books was therefore:

$375m - $104m = $271m

This writedown must have been because the price of Pendal shares showed a 'significant or prolonged decline in fair value below cost'. Before the implementation of AASB 9 in FY2019, these changes in value were only made in exceptional circumstances. Nevertheless the fall in Pendal share price from $11.5 (EOFY2017) to $8.79 (EOFY2018), while substantial, represents a loss in capital value of 'only' $69.1m for Westpac's stake. I don't know why the recorded loss blew out to $104m.

5/ Over FY2019, WBC continues to own their 10% residual shareholding in Pendal. However the residual shareholding remains on the 'may be sold' list. Consequently Westpac has elected to remove any contribution from Pendal from what they term their 'cash earnings' (p147 WBC Annual Result Presentation 2019). 'Cash Earnings' is a construct by Westpac which they consider best reflects the performance of their underlying business. 'Cash Earnings' in this sense is a bit of a misnomer because the now excluded 'Pendal dividend received' is indeed cash!

-------

Now we return to figures associated with the FY2018 WBC balance date of 30th September 2018 (after the Pendal name change). At that time the Westpac internally owned and managed fund business arm was still called "BT Financial Group Australia"! But this is not really remarkable, because "BT Investment Management Limited"(BTIM) (now Pendal) and "BT Financial Group Australia" were truly distinct and separate entities.

By EOFY2019, what was the Westpac division "BT Financial Group Australia" has been split up and the business sub units reallocated within other Westpac divisions. The effect of this can be demonstrated by looking at two different reporting perspectives the reallocation of FY2018 earnings between Westpac divisions in accordance with the table below:



Westpac Business Unit Cash EarningsFY2018 (from AR2019 p157)FY2018 (from AR2018 p155)Difference


Consumer Bank$3,423m$3,140m+$283m (+9.0%)


Business Bank$2,756m$2,159m+$597m (+28%)


BT Financial Group$0m$645m-$645m (-100%)


Westpac Institutional Bank$1,093m$1,086m+$7m (+0.65%)


Group Business($141m)$101m-$242m (NM)


Total Australian Cash Earnings$8,065m$8,065m$0m




As you can see from AR2019 retrospective reallocation, what was the remaining BT business unit, the 'BT Financial Group' has been 'written out of history' a year down the track.

As was reported in the news at the time:

https://www.smh.com.au/business/banking-and-finance/westpac-quits-financial-advice-in-deal-with-viridian-20190319-p515cr.html

"Westpac will continue to provide life insurance and a wealth management platform, Panorama, under the BT banner and will refer clients seeking financial advice to a panel of firms, as it would with people needing accounting or legal advice."

So Westpac still owns the "BT brand" and will still use the BT label on certain products.

"Chief executive Brian Hartzer on Tuesday said selling investment advice had become unprofitable, citing rising costs and the impact of the Future of Financial Advice (FOFA) laws, which banned advisers from receiving commissions on investment products."

This is an extraordinary thing to say when just one year earlier Westpac's internal wealth management division made cash profits of $645m (see above table). However, Hartzer must have only talking about giving 'personal advice'. Only the small bit of the internal wealth business ('personal advice') that hasn't been reallocated (see above table) has been on sold to "Viridian Advisory". So who are 'Viridian Advisory'?

-------

"Viridian Advisory will take over part of the bank's advice arm while the rest of Westpac's BT Financial Group businesses - private wealth, superannuation, life insurance and investments - will be rolled into its consumer and business banking divisions."

"The change would result in about 900 job losses, Mr Hartzer said, with Viridian offering employment to about 175 BT salaried positions (including 90 financial advice staff , and other management and support staff)."

"Viridian's chief executive and co-founder, Glenn Calder, said the deal with Westpac would set the firm up for "strong growth", 2as the industry focused on fees for service and the provision of quality advice."

--------

Through all of this I have not found any mention of how much Viridian paid to WBC to take over the personal advice business. Considering it was loss making, maybe only a token amount? In the annual results presentation for FY2019 on slide 17, a sale of $10m of 'financial planning assets' was reported. This exit from the "financial planning business" is expected to lead to a $50m loss in 'non-interest income' (slide 28 ARP2019). Nevertheless,

"quitting financial advice is predicted to remove about $280 million in annual costs"

for Westpac.

Some more background on Viridian may be found here:

From:

https://www.professionalplanner.com.au/2019/03/btfg-viridian-deal-in-negotiations-for-9-months/

-------

Viridian is an unlisted company which currently (prior to the Westpac advisor buyout) has six offices across four states and a “ten or twelve-year history”, according to Calder. Most of the employees are former Westpac staff who banded together to purchase the business from the bank.

“The nucleus of our company comes from Westpac,” he said. “All of our staff and some of our clients are shareholders and you need to be a connected party to have an ownership stake in Viridian.”

--------

SNOOPY

[Snoopy]

After much consternation in deciding what liabilities to include and what to leave out, I have reached a point where I am going to have a go at calculating the 'bank levy' that Westpac paid in FY2019. The levy would have been payable on averaged account balances, not what was in each account at the end of the year. I have averaged these balances between EOFY2018 and EOFY2019 to get 'averaged balances'. This answer will almost certainly not be correct, but is the best I can do given the financial disclosures available.

It is interesting to note that while in AR2017. the Chairman was vehemently opposed to the bank levy and asked shareholders to keep the pressure up on their MPs to get the tax reversed. Yet in AR2019, I haven't been able to locate even a mention of the tax. Somewhere along the line has it been subsumed into 'other expenses'? But I digress.




EOFY2018EOFY2019
FY2019 AveragedReference


Corporate Bonds
$103,159m$109,340m$106,250m(Senior Debt p198 AR2019)


Commercial Paper
$52,693m$56,883m$54,788m(Repurchase Agreements p197, Covered Bonds, Securitization and Structured Entities p198 AR2019)


Certificates of Deposit
$38,731m$41,534m$40,133m
(Certificates of Deposit p195 AR2019}


Tier 2 Capital Instruments
$8,310m$12,502m$10,406m(Total Tier 2 Loan Capital p200 AR2019)


Total
$211,577m



$211,577m x 0.06/100 = $127m

In the AR2017 'Westpac wail', the Chairman was talking about an annual tax of about $100m. So I judge my bank levy estimate for FY2019 of $127m as 'somewhere in the ball park'. I have yet to find the actual 'bank levy' figure paid over FY2019.







So where could I have gone wrong? Much of the 'consternation' I referred to in a previous post I list below.

1/ Note 24 of AR2019 gives more details on Westpac's Securitized Loans and Covered Bonds. These loans and associated liabilities and Covered bond and Repurchase Agreement total ($66,651m) does not tally up with that presented in the balance sheet ($56,883m). It could be that the bank levy applies to the Note 24 total, and not the balance sheet total.

2/ I have not considered that the 'Provisions' listed in the balance sheet liabilities that are further broken down in Note 27 are part of the government guarantee. Some of these provisions relate to worker entitlements, in particular leave. Since workers are almost always near the head of the queue to be paid out in the event of a liquidation, I did not consider a government guarantee was required on those payments. Other provisions related to restructuring and impairments on credit commitments. I considered these provisions transient and not indicative of the longer term capital position of the bank. So I didn't count any of this as part of the bank liabilities to be guaranteed.

3/ I didn't consider that any of the 'Derivative Financial Liabilities' were positions that would need to be bailed out. I considered that most of these were taken out to provide certainty of cashflows and would end up being neutral by the time any underlying loan was repaid.

I may have been wrong on those 'executive decisions' I made when considering Westpac's liability position. And I don't think that even if I had included all those extra liabilities it would have been enough to make up the difference. But there you are :-(.


I have plucked up the courage to make my changes and see if I can improve my estimate of how the bank levy was calculated.

The problem is that if we use the known amount of the Bank Levy paid over 2019 of $388m, then at the declared rate of 0.06%, we must be looking at an averaged levied bank liability balance of:

$388m / 0.0006 = $646,667m

That is a huge step up from the $211,577m total listed in the table above. So let's do the recalculation.




EOFY2018EOFY2019
FY2019 AveragedReference


Corporate Bonds
$103,159m$109,340m$106,250m(Senior Debt p198 AR2019)


Commercial Paper
$63,211m$66,651m$64,931m(Repurchase Agreements Covered Bonds, and Securitization p248 AR2019)



Certificates of Deposit
$38,731m$41,534m$40,133m
(Certificates of Deposit p195 AR2019}


Provisions
$2,026m$3,169m$2,598m
(Provisions p253 AR2019}



Derivative Financial Instruments
$24,407m$29,096m$26,752m
(Total Net Derivatives p206 AR2019}



Tier 2 Capital Instruments
$8,310m$12,502m$10,406m(Total Tier 2 Loan Capital p200 AR2019)



Total
$250,530m



Even with adjustments this total is still $400,000 shy of the total I was expecting. This means something is still badly wrong in my 'reimbursable liabilities base'. Looking through the liabilities in the balance sheet again, the only item that can make up that kind of difference is 'customer deposits'. If we look in note 16 AR2019 page 196 we can see that total Australian deposits (less the certificates of deposit that I have already counted) add up to: $468,254m - $30,367m = $437,887m. I have excluded the 'New Zealand' and 'Other Overseas' deposits because it is doubtful an Australian Bank Levy would cover overseas deposits for non-Australians. Take away the derivative guarantees again (I am still dubious about those) and we are getting close to that implied liability base number. The Australian bank term deposits must be covered by the bank levy after all! This is the only reasonable explanation I can think of to explain why the bank levy charge paid by Westpac is so high.

SNOOPY

[Snoopy]

Even with adjustments this total is still $400,000 shy of the total I was expecting. This means something is still badly wrong in my 'reimbursable liabilities base'. Looking through the liabilities in the balance sheet again, the only item that can make up that kind of difference is 'customer deposits'. If we look in note 16 AR2019 page 196 we can see that total Australian deposits (less the certificates of deposit that I have already counted) add up to $437,877. I have excluded the overseas deposits because it is doubtful an Australian Bank Levy would cover overseas deposits for non-Australians. Take away the derivative guarantees again ( I am still dubious about those) and we are getting close to that implied liability base number. The Australian bank term deposits must be covered by the bank levy after all! This is the only reasonable explanation I can think of to explain why the bank levy charge paid by Westpac is so high.


I have gone back to my original assessment of 'guaranteed liabilities' and added back in Australian customer bank account balances. I wasn't happy with the changes in iteration 4.2 which were made to try and 'get the numbers to fit'. I am estimating my 'average' from knowing the start of year and end of year end point values (which is not an entirely accurate method, but is acceptable given the inputs we have available).




EOFY2018EOFY2019FY2019 AveragedReference


Corporate Bonds
$103,159m$109,340m$106,250m(Senior Debt p198 AR2019)


Commercial Paper
$52,693m$56,883m$54,788m(Repurchase Agreements p197, Covered Bonds, Securitization and Structured Entities p198 AR2019)



Certificates of Deposit
$38,731m$41,534m$40,133m
(Certificates of Deposit p195 AR2019}


Customer Deposits (Australia)
$437,887m
(Non-interest bearing, interest bearing at call, interest bearing term p196 AR2019}
Progress

Tier 2 Capital Instruments
$8,310m$12,502m$10,406m(Total Tier 2 Loan Capital p200 AR2019)


Total
$649,464m



Bank Levy Estimate Calculation for FY2019

0.0006 x $649,464m = $390m

This is very close to the declared bank levy figure of $388m. I don't expect my calculation to match the actual figure exactly. That is because, customer deposits aside, I am calculating an average over the year by just knowing the beginning and end points. The other data that I need in between to calculate a true annual average data is missing. Yet I am very encouraged that my calculated figure is so close. Why is this a big deal? Because now I can use the same method to calculate what the bank levy would have been if it had been in place over the whole of FY2017, FY2016 and FY2015. And I need to do that so that I can decouple operational performance of the bank from any extra taxes imposed.

SNOOPY

[Scrunch]

EOFY2018EOFY2019FY2019 AveragedReference


Corporate Bonds
$103,159m$109,340m$106,250m(Senior Debt p198 AR2019)


Commercial Paper
$52,693m$56,883m$54,788m(Repurchase Agreements p197, Covered Bonds, Securitization and Structured Entities p198 AR2019)



Certificates of Deposit
$38,731m$41,534m$40,133m
(Certificates of Deposit p195 AR2019}


Customer Deposits (Australia)
$437,887m
(Non-interest bearing, interest bearing at call, interest bearing term p196 AR2019}


Tier 2 Capital Instruments
$8,310m$12,502m$10,406m(Total Tier 2 Loan Capital p200 AR2019)


Total
$649,464m


I guess SuncorP also elected not to follow.

[Snoopy]

I guess Suncorp also elected not to follow.


For those who came in late, the banking levy in Australia has been applied to the big four retail banks plus MacQuarie bank. Suncorp Bank is a smaller bank not covered by the levy. If we go back to the time the levy was introduced

https://www.suncorpgroup.com.au/uploads/pdf/reports/Suncorp%20Bank%20APS330%20March%202017.pdf

Then here is what Suncorp had to say on the matter:

-----

“Australia has a strong banking system and Suncorp supports the principles of the Financial Services Inquiry to achieve competitive neutrality,”Mr Carter said. “The Treasurer announced two measures that have the potential to support competitive neutrality –the Bank levy and the harmonisation of supervision of the ADI and non-ADI sector. “These measures have the potential to further improve the effectiveness of the macro prudential settings that have recently been introduced and will go some way to realising a more level playing field.”

-----

The 'more level playing field' comment comes because the big four banks have a fund raising advantage simply because of their scale. So it is only natural that the smaller players in the Australian finance market would approve of a new equalizing tax that they don't have to pay!

SNOOPY

[Snoopy]

The Westpac Group Tax Transparency Report for the year ended 30 September 2019 details A$388m of Major Bank Levy paid for FY19 compared with A$377m for FY18. The footnote states these amounts were the cash actually paid for the year, which may be different from the Bank Levy liability for each of FY19 and FY18 however the amounts are consistent y-o-y.

See https://www.westpac.com.au/content/dam/public/wbc/documents/pdf/aw/sustainability/Westpac_Tax_Transparency_Report.pdf



Now I can use the same method to calculate what the bank levy would have been if it had been in place over the whole of FY2017, FY2016 and FY2015. And I need to do that so that I can decouple operational performance of the bank from any extra taxes imposed.


Bank Levy Estimate Calculation for FY2017




EOFY2016EOFY2017FY2017 AveragedReference


Corporate Bonds
$106,626m$98,823m$102,725m(Senior Debt p165 AR2017)


Commercial Paper
$47,760m$46,511m$47,136m(Repurchase Agreements p164, Covered Bonds, Securitization and Structured Entities p165 AR2017)


Certificates of Deposit
$46,463m$46,921m$46,692m(Certificates of Deposit p163 AR2017}


Customer Deposits (Australia)
$415,591m
(Non-interest bearing, interest bearing at call, interest bearing term p164 AR2017}


Tier 2 Capital Instruments
$8,947m$9,238m$9,093m(Total Tier 2 Loan Capital p166 AR2017)


Total
$621,237m



Bank Levy Estimate Calculation for FY2017

0.0006 x $621,237m = $373m

From AR2018 p10 "The levy cost us $378m this year, $283m higher than 2017." By simple subtraction this means that the bank levy paid in FY2017 was $95m (confirmed in AR2017 p17). But the levy was only payable for three months of that year. So we have to make an incremental bank levy adjustment of: $373m - $95m = $278m, to bring FY2017 into line with subsequent years in which the bank levy is payable over the whole year.

Note

There was no bank levy payable over FY2016 and earlier. However, if we imagine there was, and adjust for it accordingly in a retrospective way, this will provide a better 'measuring yardstick' to compare the business performance with going forwards.

Bank Levy Estimate Calculation for FY2016




EOFY2015EOFY2016FY2016 AveragedReference


Corporate Bonds
$87,645m$106,626m$97,156m(Senior Debt p160 AR2016)


Commercial Paper
$55,593m$47,760m$51,676m(Repurchase Agreements p159, Covered Bonds, Securitization and Structured Entities p160 AR2016)


Certificates of Deposit
$48,184m$46,463m$46,692m(Certificates of Deposit p158 AR2016}


Customer Deposits (Australia)
$380,682m
(Non-interest bearing, interest bearing at call, interest bearing term p159 AR2016}


Tier 2 Capital Instruments
$7,912m$8,947m$8,430m(Total Tier 2 Loan Capital p161 AR2016)


Total
$585,248m



Bank Levy Estimate Calculation for FY2016

0.0006 x $585,248m = $351m




Bank Levy Estimate Calculation for FY2015




EOFY2014EOFY2015FY2015 AveragedReference


Corporate Bonds
$82,377m$87,645m$85,011m(Senior Debt p158 AR2015)


Commercial Paper
$55,303m$55,933m$55,628m(Repurchase Agreements p157, Covered Bonds, Securitization and Structured Entities p158 AR2015)


Certificates of Deposit
$51,577m$48,184m$49,881m(Certificates of Deposit p156 AR2015}


Customer Deposits (Australia)
$354,199m
(Non-interest bearing, interest bearing at call, interest bearing term p157 AR2015}

The Westpac Group Tax Transparency Report for the year ended 30 September 2019 details A$388m of Major Bank Levy paid for FY19 compared with A$377m for FY18. The footnote states these amounts were the cash actually paid for the year, which may be different from the Bank Levy liability for each of FY19 and FY18 however the amounts are consistent y-o-y.

See https://www.westpac.com.au/content/dam/public/wbc/documents/pdf/aw/sustainability/Westpac_Tax_Transparency_Report.pdf



Tier 2 Capital Instruments
$6,376m$7,912m$7,104m(Total Tier 2 Loan Capital p159 AR2015)


Total
$551,863m



Bank Levy Estimate Calculation for FY2015

0.0006 x $551,863m = $331m




Note that the bank levy is a tax deductible expense for Westpac.

SNOOPY

[Snoopy]

I aim to assess whether the 'Westpac Group' is a suitable candidate to which to apply the (Mary) 'Buffett' growth model .

WBC, incorporated in Australia, but also listed on the NZX describes their operation of their business in the FY2015 Annual Report as follows:

"to be one of the world's great service companies helping our customers, communities and people to prosper and grow"

It would be an oversimlification to think of Westpac just as a traditional bank. They have a strong wealth and insurance business through associated company BT Group, in which they sold down their controlling stake in FY2015. The business is based around strong Australian and New Zealand geographic foundations. The New Zealand business is a self contained unit.

The business objectives are to support:

1/ Australian and New Zealand consumers.
2/ Australian and New Zealand businesses, both large and small
2/ Regional Trade and Capital Flows for business customers via the WIB ("Westpac Institutional Banking Division".)
3/ A 'digital ready infrastructure' for the future.

Major Competitors in this sector are listed in order by $A revenue (interest income).

1/ Commonwealth Bank of Australia: $33,817m
2/ Westpac Bank: $31,822m
3/ ANZ Bank: $29.951m
4/ National Australia Bank $27,629m

Conclusion: As number two in the market, WBC passes the first Buffett Point test.


An overseeing body shake up of the Australian big four banks has seen Westpac put up as 'Available for Sale' their last 10% link with their listed wealth management associate - Pendal Group - and realign some residual wealth management in house functions under the in house broad based 'Persomal' and 'Business' customer units.

'Personal' incorporates Bank Accounts, Home Loans, Credit Cards, Personal Loans, and International & Travel. They offer consumers share trading, Insurance (including mortgage insurance) and superannuation services (investing in other peoples managed funds and listed shares.)

'Business' for small to medium enterprises adds invoicing, merchant services, business loans, business insurances and forex services.

'A third business unit Westpac Institutional Bank' (WIB) looks after corporate and government banking requirements.

Westpac continues to claim they aspire :

"To be one of the world’s great service companies, helping our customers, communities and people to prosper and grow.”

Westpac use their 'Net Promoter Score' (NPS) to claim they are number 2 (of the big four banks) for consumers and number 1 for business. The Australian NPS scores are negative. (-7.3 for consumers and -4.5 for business: refer slide 38 in FY2019 Result Presentation). These NPS scores can vary between -100 and +100, withj a level above +30 considered to be 'good'. So even though Westpac does well in reference to other banks, these scores show most Westpac customers would not recommend Westpac's services to others. That doesn't tie in with the vision of being a 'great service company'. The corporate business fares much better with an NPS score of +51. Perhaps that shows where the real service strength of Westpac lies?

Major Competitors in the Australasian banking sector are listed in order by $A revenue for FY2019 (interest income + non-interest income).

1/ Commonwealth Bank of Australia: $34,588m +$4,994m + $1,073m + $150m = $40,805m
2/ Westpac Bank: $33,222m + $1,655m + $1,029m + $929m + $129m = $36,964m
3/ ANZ Bank: $31,077m + $4,058m + $126m + $262m = $35,523m
4/ National Australia Bank: $29,203m + $4,373m = $33,576m

Conclusion: As number two in the market by turnover, WBC passes the first Buffett Point test.

SNOOPY

[Snoopy]

WBC


Annual Net Impaired Asset Expense (A)Total Impaired Loan and Credit Commitment Provision (B)(A)/(B)Total Loans (impairment (B) included) (C)(B)/(C)EBT (before impaired asset exposure) (D) (A)/(D)


FY2008$931m$2,174m43%$315,719m0.7%$6,150m15.1%%


FY2009$3,238m$4,734m68%$468,193m1.0%$9,334m34.7%


FY2010$1,456m$5,061m26%$482,716m0.9%$9,494m15.3%


FY2011$993m$4,414m22%$501,023m0.9%$9,507m10.4%


FY2012$1,212m$4,241m29%$518,686m0.8%$10,026m12.0%%


FY2013$847m$3,949m21%$540,113m0.7%$10,619m8.0%


FY2014$650m$3,481m19%$583,824m0.6%$11,390m5.7%753m


FY2015$753m$3,332m23%$626,648m0.5%$12,169m6.2%
023m

FY2016$1,124m$3,602m31%$665,528m0.5%$11,768m9.6%
%

FY2017$853m$3,119m27%$688,038m0.5%$12,368m6.9%


FY2018$710m$3,053m23%$712,733m0.4%$12,441m5.7%%507 m
,
,
FY2019$794m$3,913m (*1)20%$718,683m0.5%$10.543m7.5%




(*1) Includes a $980m increment from the adoption of accounting standard AASB9 (on Financial Instruments, including impairment). AASB9 includes a new 3 level impaired debt assessment classification as part of the newly adopted ECL (Expected Credit Loss) model.

SNOOPY

[macduffy]

Remarkably consistent these last several years. What conclusions do you draw from that, Snoopy?

[Snoopy]

Remarkably consistent these last several years. What conclusions do you draw from that, Snoopy?


I know there are people out there whose eyes glaze over when I produce one of my expansive tables. So I am going to encourage those people to look again at how much useful information can be gleaned from such a table as I answer your question Macduffy.

1/ The consistent (B/C) figure, at least from around FY2014, shows that Westpac like to keep the impaired loan provision percentage in step with the size of the loan book. It was certainly higher in FY2009. But that was a snapshot of what happens in a financial crisis. From a loan book perspective, it took about five years to recover from the financial crisis, as evidenced by the (B/C) ratio 'normalizing' between 2009 and 2014. Another way to interpret this is to say that Westpac predict a constant default rate all through the banking cycle. I don't believe the default rate is constant throughout the banking cycle.

2/ Westpac didn't see the GFC coming. The spike in impairment expenses in FY2009 and FY2010 was reactive, not pre-emptive. The impairment provisioning pre GFC and during the GFC was seriously inadequate, as evidenced by the high (A/B) numbers in FY2008 and FY2009.

3/ Some have criticized the AASB9 standard as being 'too conservative' in that it ends up requiring a bank to set aside a higher impairment provision pool than under the old standard and that more of these impairments than in the past may end up being reversed. This would be evidenced in the table by the ratio (A/B) being high. However in the context of FY2013, FY2014 and FY2015, in the recovery period following the financial crisis, the "FY2019 (A/B) figure" looks about the same. I think the table shows that those that have overseen the introduction of AASB9, at least in the case of Westpac, have struck the right balance.

4/ Once the impaired asset net expense is taken out of the picture then earnings are remarkably consistent (table column D). I should have said 'consistently steadily increasing'. I would say FY2019 was an exception to this rule with a significant drop. But this drop was largely due to $1b in provisioning to see wealth management customers set right. IOW this had nothing to do with the banks lending operations. Add back the near $400m in bank levy that didn't apply pre FY2017 and the picture still looks operationally consistent. This is another way of saying don't pay too much attention to the significance of bank headline profit figures. 'Buying on weakness' has been a good investment strategy for those holding bank shares for income purposes. Of course, those keen on Cryptocurrencies will tell you 'it is different this time', and banks will never be what they were.

SNOOPY

[macduffy]

Thanks, Snoopy. Keeping the impaired loan provision % in step with the size of the loan book sounds rather contrived to me. Shouldn't that fluctuate more from year to year depending on actual experience, economic/business conditions, valuations etc?

[Snoopy]

'The bank that may have facilitated pedophiles'

doesn't sound like a great marketing campaign line.

AUSTRAC (The Australian Transaction Reports and Analysis Centre) is investigating and

"Any enforcement action against Westpac may include civil penalty proceedings and result in the payment of a significant financial penalty which Westpac is currently unable to reliable estimate." (AR2019 p255)




Bankers know a lot about their customers and their spending habits. Some say they can identify if your bankcard and security code is stolen by flagging as few as two to three transactions. Banks also have anti-money laundering responsibilities and are required to look out for proceeds of crime. I guess some banks take their responsibilities more seriously than other banks. It appears only Westpac facilitate the funding of Paedophile rings on a large scale. Other banks put Children above profit.



The 24th November 2019 Westpac press release indicates that Westpac still expect to be fined, for not having the necessary checks on some accounts. However they have rolled out the following $54m dollars worth of 'good corporate citizen' measures:

-----

1/ Funding for the International Justice Mission (IJM): Westpac will match IJM's current level of funding, investing $18 million over three years to tackle Online Sexual Exploitation of Children (OSEC) in the Philippines. This will enable IJM to expand on-the-ground initiatives in Southeast Asia to help end child exploitation.

2/ Funding for SaferKids: Westpac will match the Australian Government's current level of funding for its SaferKids partnership with Save the Children, UNICEF and The Asia Foundation, investing $6 million over six years to raise awareness of Online Sexual Exploitation of Children (OSEC) and support programs to protect children in the Philippines.

3/ Prevention: Westpac will seek the guidance of industry experts, through the convening of an expert advisory roundtable, to develop a program of actions to support the prevention of online child exploitation. Westpac will provide funding of up to $10 million per year for three years to implement these recommendations

-----

In house,

1/ Westpac have closed their "Westpac Australasian Cash Management Product" and "LitePay international funds transfer system". These were two platforms where funds could be transferred with little accountability.

2/ Westpac intend to hire an additional 200 people to add to their financial crime resourcing team. This team has already been boosted by 325, to 750 people over the last three years.

3/ Westpac will invest $25 million to improve cross-border and cross-industry data sharing and analysis to better support regulators and authorities to fight financial crime

Those financial commitments add up to $79m, excluding Westpac's own incremental internal costs.

The 25th November 2019 Westpac press release contains more details on Westpac's costs for the full support of the anti-pedophile program:

"Westpac has made a number of commitments including to improve its financial crime program, support industry initiatives to enhance financial crime monitoring and provide additional support and resources to organisations that are working to eradicate child exploitation. We estimate these commitments will increase expenses by up to $80 million (pre tax) in FY20 when the majority will be incurred or provided for. These expenses will be included in cash earnings and treated as notable items."

The 'notable items' comment is made in relation to the whole thing being a 'non-operational matter." I would not include it as part of 'normalised earnings'.

I am not sure what kind of fine Westpac may expect as a result of their prior inactions, to be offset by their subsequent make good efforts at least in a judge's eye. I don't think they will get away with a wet bus ticket though. But given that Westpac was a conduit for crime rather than doing the crime themselves, I wonder if it will be somewhat in the order of $20m? That would see Westpac face a total cost of $80m + $20m = $100m for the whole matter. $100m sounds like a good 'headline punishment' to face. Anyone know how this figure compares with existing court precedents?

These 'good corporate citizen' measure responses will form part of the FY2020 'one off expense' picture.

SNOOPY

[Snoopy]

Thanks, Snoopy. Keeping the impaired loan provision % in step with the size of the loan book sounds rather contrived to me. Shouldn't that fluctuate more from year to year depending on actual experience, economic/business conditions, valuations etc?


I should declare that my 'sudden interest' in impairment charges is because I am trying to figure out whether there is a one off 'income statement change' as a direct result of implementing the new 'Impairment Rules' under AASB 9 verses what would have happened under the old system through the now super-seeded AASB 139. I already know there is a balance sheet implication. This is made clear in AR2019 on p184 where there is a $980m (that is right, almost a billion dollars) increase in the impairment provision caused by the change in standard,

Old System under AASB 139

Figuring out what happened under the old system seems much more straightforward, The Impaired Loan Provision was 'off balance sheet'. I deduced that by noting that the FY2018 Loans Total on the Balance sheet of $709,690m had already had a 'Provision for Impairment Charges' ($2,814m) deducted off it (FY2018 figures from AR2019 p177).

You could consider that the $2,814m 'impaired loan provision' for FY2018 was a 'buffer fund'. The actual money written out of the income statement in FY2018 was the annual net change in that buffer fund, $710m in FY2018 (see p163 AR2019). That $710m cross references to the income statement (AR2019 p136). The $710m impairment expense was basically the difference between the provisions raised during the year net of any recoveries. So, and here is my answer to your question in context in a very long winded round-a-bout way Macduffy, it is probably OK to have your 'impaired loan provision' as a near constant percentage of the total loan book provided it isn't upset all the time, like by having an 'annual impairment charge' significantly higher than the value of the buffer for example. The actual amount written off each year is not the full value of the buffer fund.

New System under AASB 9

The Impaired Loan Provision is still 'off balance sheet'. The FY2010 Loans Total on the Balance sheet of $714,770m has had the new 'Provisions for ECL (Expected Credit Losses) ' ($23,608m) deducted off it ( AR2019 p177). Yet looking at the amount written off as the FY2019 annual impairment charge ( $794m) , it is no longer clear to me where that number comes from. The write offs of $1,154m (p184 AR2019) , which seem to be a combination of 'individually assessed provisions' and 'collectively assessed provisions' must be offset by some 'recoveries''. 'Recoveries' of $172m can be found on p192 of AR2019.

But $1,154 - $172m = $982m

That isn't the figure of $792m written off. There is still $190m of 'hidden assets' restored but unaccounted for! I invite all Shareholders reading this to please take a quick check under their beds tonight before 'turning in' to see if you can locate these 'hidden assets'!

SNOOPY

[Snoopy]

Westpac dividends have had associated NZ imputation credits (to a limited degree) for several years now. You can claim these imputation credits as tax paid in New Zealand on your New Zealand income. However these imputation credits are not paid to 28% and are insufficient to extinguish your NZ tax obligations on the whole Westpac dividend.


Some dividend hounds spurn overseas shares because the dividends they pay do not come with NZ imputation credits attached. However Westpac is an exception as it does offer NZ imputation credits, courtesy of the highly profitable fully owned subsidiary Westpac New Zealand. We cannot buy shares in Westpac New Zealand though, only the Australian parent company. The Westpac dividend has been remarkably steady in $A terms, albeit it has taken a hit in December 2019, a drop which looks likely to stick over the next few years. NZ investors have some exchange rate volatility to deal with when banking their dividends. Nevertheless in recent years the volatility of the exchange rate between NZ and Australia has been markedly less than between NZ and other major trading currencies. Why the dividend reduction? Westpac has more shares on issue now after the December share issue. And Westpac needs to retain more earnings to remain 'unquestionably strong' in the eye of the banking regulators. So although the dividend has been reduced, the trade off is that shareholders' investment in WBC should be 'safer' going forwards.

The table below outlines the dividends paid over the past five years and the benefits accruing to NZ shareholders from those imputation credits.



Payment Date dps ($A) AUD/NZD Exchange Rate dps ($NZ) Imputed Credit ($NZ)Gross Dividend ($NZ)


02-07-20140.900.92720.97070.06001.0307


19-12-20140.920.94740.97110.06001.0311


02-12-20150.930.88061.05610.06001.1161


21-12-20150.940.94120.99870.06001.0587


04-07-20160.940.96010.97910.07001.0491


21-12-20160.940.95290.98650.07001.0565


04-07-20170.940.95770.98150.07001.0515


22-12-20170.940.91051.03250.07001.1025


04-07-20180.940.91511.02720.07001.0972


20-12-20180.940.95260.98680.07001.0568


24-06-20190.940.95030.98920.07001.0592


20-12-20190.800.95950.83380.07000.9038


Total11.810.8012.61



80c extra over five years is not a game changer. But it is not to be sneezed at either. I observe that although the last dividend was reduced, the imputation credit attached to that dividend was not reduced. So going forwards, the Westpac imputation credit is likely to be more important in relative terms than in past years.

SNOOPY

[Snoopy]

I should declare that my 'sudden interest' in impairment charges is because I am trying to figure out whether there is a one off 'income statement change' as a direct result of implementing the new 'Impairment Rules' under AASB 9.

New System under AASB 9

The Impaired Loan Provision is still 'off balance sheet'. The FY2010 Loans Total on the Balance sheet of $714,770m has had the new 'Provisions for ECL (Expected Credit Losses) ' ($23,608m) deducted off it ( AR2019 p177). Yet looking at the amount written off as the FY2019 annual impairment charge ( $794m) , it is no longer clear to me where that number comes from. The write offs of $1,154m (p184 AR2019) , which seem to be a combination of 'individually assessed provisions' and 'collectively assessed provisions' must be offset by some 'recoveries''. 'Recoveries' of $172m can be found on p192 of AR2019.

But $1,154 - $172m = $982m

That isn't the figure of $792m written off. There is still $190m of 'hidden assets' restored but unaccounted for!


I have done more investigation into the change in the annual impairment expense from the adoption of the new accounting rules under AASB 9. I have taken the divisional Information, tallied it up and compared it to the total listed elsewhere in the same annual report. The exercise is complicated by the disestablishment of the BT Financial Management Group as a business unit over FY2019. Comparative Impairment figures for FY2018 from the AR2019 have been restated.



AR2019: Impairment FY2019AR2019: Impairment FY2018ReferenceAR2018: Impairment FY2018Reference


BT Financial Group$6m(AR2018 p101)


Consumer$581m$486m(AR2019 p96)$461m(AR2018 p99)


Business$272m$321m(AR2019 p97)$291m(AR2018 p100)


Westpac Institutional Bank$46m($16m)(AR2019 p98)($38m)(AR2018 p104)


Westpac New Zealand($10m)$22m(AR2019 p100)$2m(AR2018 p105)


Group Buisness($55m)($1m)(AR2019 p101)($2m)(AR2018 p107)


Total$794m$812m$710m


Impairment Charges$794m$710m(AR2019 p163)$710m(AR2018 p162)



The table does not lie. The accumulated restated impairment information for FY2018 in AR2019 does not match the impairment total shown in another part of the same report. Yet if I perform the same exercise on the FY2019 impairment, and the FY2018 information in AR2018, then the totals do match. There is something wrong here and I don't think it is my arithmetic. The adoption of AASB 9 appears to have retrospectively increased the annual impairment expense for FY2018 by $102m. Yet when the comparative annual income statement for FY2019 with FY2018 was compiled, this change has been ignored.

SNOOPY

[Snoopy]

The accumulated restated impairment information for FY2018 in AR2019 does not match the impairment total shown in another part of the same report. Yet if I perform the same exercise on the FY2019 impairment, and the FY2018 information in AR2018, then the totals do match. There is something wrong here and I don't think it is my arithmetic. The adoption of AASB 9 appears to have retrospectively increased the annual impairment expense for FY2018 by $102m. Yet when the comparative annual income statement for FY2019 with FY2018 was compiled, this change has been ignored.


Heartland Bank does all their background day to day retail account operations through Westpac. Heartland has also adopted the new NZIFRS 9 (equivalent to the Australian AASB 9) inspired treatment of Impaired Assets. Heartland has also re-organised their customer segments between FY2018 and FY2019. So I think if Westpac are having an issue with changing their impairment expense as a downstream result of implementing AASB 9, then Heartland should have the same issue. Let's see if that is true:




Impairment FY2019 (AR2019) Impairment FY2018 (AR2019)Reference Impairment FY2018 (AR2018)Reference


Households$13.048m(AR2018 p23)


Motor$5.009m$7.779m(AR2019 p16)


Reverse Mortgages$0.268m($362m)(AR2019 p16)


Other Personal$8.429m$5.741m(AR2019 p16)


Business$7.102m$6.275m(AR2019 p16)$7.862m(AR2018 p23)


Rural($0.132m)$2.400m(AR2019 p16)$1.157m(AR2018 p23)


Australia$0.234m(AR2019 p16)(AR2018 p23)


Total$20.676m$22.067m$22.067m


Impairment Charges$20.676m$22.067m(AR2019 p5)$20.067m(AR2018 p14)



As you can see in this instance all the numbers match up. So it looks like my theory that the adoption of NZIFRS 9/ AASB 9 has an effect on 'impaired asset expense' is not supported by examining the Heartland accounts. I guess at Westpac, there must be another reason, external to the adoption of AASB 9, to explain the anomaly that I have found.

SNOOPY

[Snoopy]

I am attempting to unpick the 'Wealth Management' side of WBC from what is left.

--------

1/ The separately listed wealth business was first partially floated on 10th December 2007. On that date 40% of what used to be called "BT Investment Management Ltd" (BTIM) (BTT.AX) was floated to the public. A net gain of $141m, pre tax, was generated on this sale (AR2008 p82/p141).

2/ On 23rd June 2015 Westpac reduced their 60.8% holding in BTIM to 31.0% with and institutional and retail offer. This resulted in a pre-tax gain of $1,036m (AR2015 p77/p135/p245). This gain included the realised gain of the 28% of BTIM sold ($492m) and the unrealised gain of the 31% interest retained ($544m).

3/ On 26th May 2017 Westpac sold a further 19% of BTIM (carrying value $471m) reducing their holding to 10% (residual carrying value $242m). The result was a net gain (net of transaction costs before tax) of $279m (AR2017 p139/p227).



$630m - $471m = $159m (Gross proceeds on sale of 19% stake)


add $375m - $242m =
$133m (Mark to market revaluation of residual stake)


less
($13m)(Former associate profit transferred to profit or loss)


equals
$279m(Total Gain as a Result of BTIM sales)



In the the end of year accounts for FY2017, the remaining 10% of BTIM owned was reclassified from an 'associate' to an 'available for sale security' at a market value of $375m.

4/ In FY2018 there was a $104m write down in the residual value of 'Pendal Group' (p160 AR2018). (Name Change Note: A decade on from the float, following approval from its own shareholders, BT Investment Management Limited (BTIM) changed its company name to "Pendal Group Limited" (PDL.AX) on 27 April 2018).

The accounting value at EOFY2018 of the 10% residual stake on the books was therefore:

$375m - $104m = $271m

5/ In FY2019, WBC continues to own their 10% residual shareholding in Pendal. However it remains on the 'may be sold' list and Westpac has elected to remove any contribution from Pendal from their cash earninmgs (p147 WBC Annual Result Presentation).

-------



Dividends Paid to Westpac by Pendal Group (PDL.ASX)




Financial Year
Ex-dividend date

Dividend per ShareDividend PayoutWestpac %ge Shareholding
Payout to WestpacSum over Financial Year Payout to Westpac



--------------------------------------------------
--------------------


FY2015
03-12-2014
19cps (35% Franked)$52.891m60.76%$32.137m


13-05-201517cps (40% Franked)$47.159m60.76%$28.634m$60.771m




------------------------------------------------------------
----------



FY2016
02-12-201520cps (40% Franked)$57.206m31.04%
$17.757m



26-05-201618cps (40% Franked)$52.521m31.04%
$16.303m$34.060m



--------------------------------------------------
--------------------



FY2017
08-12-201624cps (35% Franked)$71.365m29.54%$21.081m



25-05-201719cps (30% Franked)$54.653m29.54%
$16.144m$37.225m


------------------------------------------------------------
----------




FY2018
07-12-201726cps (25% Franked)$78.191m8.99%$7.029m



25-05-201822cps (15% Franked)$65.565m8.99%
$5.894m$12.523m


------------------------------------------------------------
----------




FY2019
06-12-201830cps (15% Franked)$89.873m10.40%$9.347m



23-05-201920cps (10% Franked)$59.897m10.40%
$6.229m$15.576m

[TR]
--------------------------------------------------
--------------------



FY2020
05-12-201925cps (10% Franked)$76.078m9.55%
$7.265m



Notes

1/ The 23rd June 2015 'sell down' of Pendal shares by Westpac was after the 17cps ex-dividend date of 13th May 2015. This means that the whole 172,100,801 Pendal shares previously owned by Westpac qualified for that dividend.

2/ The 26th May 2017 'sell down' of Pendal shares was after the 25th May 2017 19cps ex-dividend date. This means that the whole 90,814,493 Pendal shares previously held by Westpac qualified for that dividend.

SNOOPY

[Snoopy]

I am attempting to unpick the 'Wealth Management' side of WBC from what is left.

--------

1/ The separately listed wealth business was first partially floated on 10th December 2007. On that date 40% of what used to be called "BT Investment Management Ltd" (BTIM) (BTT.AX) was floated to the public. A net gain of $141m, pre tax, was generated on this sale (AR2008 p82/p141).

2/ On 23rd June 2015 Westpac reduced their 60.8% holding in BTIM to 31.0% with and institutional and retail offer. This resulted in a pre-tax gain of $1,036m (AR2015 p77/p135/p245). This gain included the realised gain of the 28% of BTIM sold ($492m) and the unrealised gain of the 31% interest retained ($544m).

3/ On 26th May 2017 Westpac sold a further 19% of BTIM (carrying value $471m) reducing their holding to 10% (residual carrying value $242m). The result was a net gain (net of transaction costs before tax) of $279m (AR2017 p139/p227).



$630m - $471m = $159m (Gross proceeds on sale of 19% stake)


add $375m - $242m =
$133m (Mark to market revaluation of residual stake)


less
($13m)(Former associate profit transferred to profit or loss)


equals
$279m(Total Gain as a Result of BTIM sales)



In the the end of year accounts for FY2017, the remaining 10% of BTIM owned was reclassified from an 'associate' to an 'available for sale security' at a market value of $375m.

4/ In FY2018 there was a $104m write down in the residual value of 'Pendal Group' (p160 AR2018). (Name Change Note: A decade on from the float, following approval from its own shareholders, BT Investment Management Limited (BTIM) changed its company name to "Pendal Group Limited" (PDL.AX) on 27 April 2018).

The accounting value at EOFY2018 of the 10% residual stake on the books was therefore:

$375m - $104m = $271m

5/ In FY2019, WBC continues to own their 10% residual shareholding in Pendal. However it remains on the 'may be sold' list and Westpac has elected to remove any contribution from Pendal from their cash earninmgs (p147 WBC Annual Result Presentation).

-------


The 'capital charge' represents the underlying change in asset value of the component of BTIM/Pendal held by parent company Westpac each year. This is not necessarily the same as the value of that asset on Westpac's books. For example, as a subsidiary, a company's assets are held on the books of Westpac at the price of purchase, irrespective of the current market price.

The numbers in the table below are derived from:

1/ The 30th September share closing price for Pendal Group on the ASX.
2/ The number of Pendal Group shares held by Westpac as listed in the corresponding annual report.




Pendal Share Price EOFY
No. Shares held EOFY
Value held EOFY
Implied Book value 'per share' to WBC on Sale Date
Gross Proceeds: Pendal Shares Sold during Year
Annual Westpac resultant 'Capital Change' (1)


FY2014
$6.15
172,800,001
$1,062.720m


FY2015




$1,036m



FY2015
$9.56
90,814,493
$868.187m


$841.467m


FY2016
$8.89
90,814,493
$807.341m


($60.846m)


FY2017



$11.07 (1)
$630m



FY2017
$11.05
30,814,493
$340.500m


$163.159m


FY2018
$8.79
30,814,493
$270.859m


($69.641m)


FY2019
$7.39
30,814,493
$227.719m


($43.140m)



(1) This figure is calculated from the book valued delivered to WBC after the sale and includes transaction costs. The actual closing price before the ex-dividend day cut off on market was $11.33.

Sample 'Capital Change' Calculation for FY2015

($1062.720m - $868.187m) + $1,036.000m = $841.467m

Notes

(1) 'Capital Change' in the table above is not necessarily reflected in the Westpac accounts of that year in the income statement. This is because:

a/ Capital gain is subject to a 30% corporate tax rate for companies operating in Australia.
b/ Capital changes appear to be only put through the accounts when a capital asset changes its category status. That means either:

1/ Transitioning from a 'subsidiary' to an 'associate' OR
2/ Transitioning from 'associate' to 'available for sale'.

When shares in a business unit do not change status during the year it appears that no 'capital adjustment' based on 'market valuation' is made, unless that asset is now classified as 'Available for Sale'. 'Available for Sale' assets are adjusted for 'fair value' in the Westpac Statement of Profit & Loss every year.

SNOOPY

[Snoopy]

I am attempting to unpick the 'Wealth Management' side of WBC from what is left.

From:

https://www.pendalgroup.com/about/corporate-approach/

We learn that what was "BT Financial Group Australia", a part of Westpac, is an unrelated business to "BT Investment Management Limited" (now Pendal Group Limited), the listed entity.

I need to 'unpick the wealth business' because:

1/ Westpac have cut all financial links with what was the separately listed wealth management arm "BT Investment Management Limited" (BTIM).

This means historical comparisons are going to be difficult from here on in.


'Pendal Group' has over the last five years, at various different times, been classifed by Westpac as:

1/ 'A Subsidiary',
2. 'An Associate' and
3/ 'An Available for Sale Asset.'

Within the Westpac accounts, the accounting treatment of 'Pendal' has changed across the years depending on how it was classified within the accounts.

From the Westpac reporting date at EOFY2015 (30th September 2015) (refer AR2015 p228), 'BTIM'/ Pendal was no longer a subsidiary of WBC.

-------

1/ Subsidiaries

Westpac controls and accordingly consolidates an entity when it is exposed to, or has the rights to variable returns from its involvement with the entity, and has the ability to affect those returns through its power over the entity.

-------

'Consolidates' means that Westpac takes their share of their subsidiary's income and puts it into their own income statement. Similarly Westpac take the values of the subsidiary's assets and liabilities and bring those across into their own balance sheet. However, the change in market capital value of that subsidiary over the year is not reflected in the Westpac income statement nor its balance sheet. Pendal ceased to be a subsidiary of Westpac on 23rd June 2015 when the 60.8% shareholding was sold down to 31%. Pendal then became an Associate.

From AR2017 p225

---------

2/ Associates

Associates are entities in which the group has significant influence, but not control over the operating and financial policies. The group accounts for associates using the equity method. The investments are initially recognised at cost (except where recognised as fair value due to the loss of control of a subsidiary) and increased (or decreased) each year of the Group's share of the associates profit (or loss). Dividends received from the associate reduce the investment in associate.


------

I note that in this case the 'exception' referred to above is what has happened. Control of BTIM/Pendal has been lost as a result of the share sell down by parent Westpac on 23rd June 2015. Accordingly the valuation of BTIM/Pendal shares on the Westpac books reflects the share price at which BTIM/Pendal transitioned from becoming a Subsidiary to an Associate.

------

Under what circumstances would Westpac have the ability to affect returns through its power over an entity? According to the BDO NZ website:

https://www.bdo.nz/en-nz/accounting-alert-august-2019/pbes-accounting-for-investments-in-associates-and-joint-ventures

"If an entity holds a quantifiable ownership interest in an investee and it holds, directly or indirectly, 20% or more of the voting power of the investee, it is presumed that the entity has significant influence, unless it can be clearly demonstrated that this is not the case."

As at 23rd June 2015, Westpac's holding in Pendal reduced from 60.8% to 31%. But 31% is well above the BDO reported 20% 'significant influence' threshold. This means that BTIM/Pendal is rightly classified as an 'Associate' after that previously referred to date.

--------

To be very clear on the difference between 'Consolidating the accounts' (for Subsidiaries) and using the 'Equity method' (for Associates)?

1/ Subsidiary Treatment: Consolidating the financial statements involves combining the firms' income statements and balance sheets together to form combined statements, from the parent's perspective. But this does not preclude any subsidiary from publishing their own set of accounts that are separate from the parent,
2/ Associate Treatment: The equity method does not combine the subsidiary's accounts in the parent's statements. But it accounts for the subsidiary as an 'investment asset' and accounts for any earnings proportionate to the parent's stake in the subsidiary that is received from the subsidiary as 'Other income'. Actual dividends received have to be subtracted from any notional proportional income, as dividends received are separately accounted for under 'Non-interest income' in the income statement.

--------

On 26th May 2017 (during FY2017) Westpac sold a further 19% of Pendal Group reducing their holding to 10%. From AR2017 p249:

"Following completion of the sale , the remaining interest in Pendal Group Limited was reclassified as available-for-sale securities."

3/ Available for Sale

Now here is where things get confusing for me. The vehicle through which Westpac hold their Pendal shares is:

"Westpac Financial Services Group Limited" (Check out 'Pendal Group' AR2018, page 104, reporting WBC 'Available for Sale' holding held by "Westpac Financial Services Group Limited." )

This vehicle is incorporated in Australia. Yet this company is still listed as a 'materially controlled entity' at the end of FY2018 (Westpac AR2018 Note 35 'Investments in subsidiaries and associates' p249), almost 18 months after the Pendal holding was reclassified from being an 'Associate' to something 'Available for Sale'!

There are a couple of possible explanations I can think of to explain this:

1/ It is possible for a shareholding in a separately listed company to be classified as an 'Associate' and an 'Available for Sale Security' at the same time.
2/ 'Westpac Financial Services Group Limited' is a holding company that still contains other assets outside of the Pendal group. For example, at one point in FY2018, 'Westpac Financial Services Group Limited' also held shares in 'Ascalan Capital Managers', which took positions in hedge funds and supplied venture capital.
3/ It is possible that a subsidiary company can be materially controlled, even if it contains a subsidiary within it that is not.

The balance sheet treatment (p124 AR2017) shows 'Available for Sale Securities' and 'Investments in Associates' as mutually exclusive classification boxes. That means my explanation 1/, above, is most likely wrong.

From AR2019 p175

"These equity securities are measured at fair value with unrealized gains and losses recognised in 'Other Comprehensive Income' except for dividend income which is recognised in the income statement"

SNOOPY

[Snoopy]

'Pendal Group' has over the last five years at various different times been described by Westpac as 'A Subsidiary', 'An Associate' and 'An Available for Sale Asset.'

The accounting treatment of Pendal has changed across the years depending on how it was described.

What is no longer clear to me is if the capital value of an 'Associate' is revalued each year. It is clear the value of an 'Associate' is marked to market value when it is first declared as an 'Associate'. But after that the value of the associate on the books is only changed by the dividend flow from the 'Associate' (in this case Pendal) to the parent (in this case WBC). Can anyone confirm?


Westpac report both a "Net Profit After tax" and a "Cash Profit" each year. For employee bonus purposes it is the "Cash Profit" that best recognises the operational performance of the company. From Appendix 1 in the Annual Results Presentation from the respective years, the annual "Cash Profit Adjustment" due to Westpac's Pendal Group Holding is listed in the table below.



Financial Year
Pendal 'NPAT' to 'Cash Earnings Adjustment' for Westpac
Explanation
End Of Year Pendal Shareholding Status for Westpac


2014


Subsidiary


2015
($665m)
Sell down of Pendal shares
Associate


2016
$0m
No Adjustment
Associate


2017
($171m)
Sell down of Pendal Shares
Available For Sale


2018
$73m
Mark to Market Loss
Available For Sale


2019
$45m
Mark to Market Loss + Separation Costs from Original Sell Down
Available For Sale



Calling these 'Cash Earnings Adjustments' looks to me to be a misnomer. For example, The $665m earned from the Pendal share sell down in FY2015 was real cash. Therefore I would argue that it should not be removed to get the "Cash Profit". I do agree that it was not representative of core business earnings though. So I can see why it was removed from the figure used to reward executive bonuses. In fact, I agree with all of the normalising adjustments listed in the table above. But I am surprised they were not declared as 'normalising adjustments', because that is exactly what they are. They are certainly not in general cash earnings adjustments (except for the mark to market changes).

Of particular interest is what happened to the normalising adjustment in FY2016 in the above table: nothing.

This is despite:

1/ Pendal being an Associate over that financial year AND
2/ The share price of Pendal declining from $9.56 to $8.89 for a paper loss on the holding of ($60.846m). AND
3/ Dividends for the year from Pendal to Westpac totalling $34.060m

If we follow the declared position in the Westpac Annual Report regarding dividends received (they are diverted from 'invested capital' to 'income': refer AR2019 p263 "Dividends received from the associate reduce the investment in the associate".), then the 'on the books' capital holding value of Westpac's investment in Pendal should have reduced by:

$60.846m + $34.060m = $94.906m

The fact that no adjustment was ever made over FY2016 is consistent with:

1/ The change in the capital value of an 'Associate Shareholding' being reflected on the Westpac books being recognised ONLY....
2/ ....as the larger stake that was sold down to transform that 'subsidiary stake' into an 'associate stake'.

Before today I had got it into my head that any 'associate stake' owned by Westpac would be revalued year to year, and resulting capital charges would flow through the income statement. However it now appears I was wrong on this point, even though this 'annual revaluation of stake' principle does apply to 'Available for Sale Securities'.

SNOOPY

[Snoopy]

Westpac continues to claim they aspire :

To be one of the world’s great service companies, helping our customers, communities and people to prosper and grow.”



Westpac Bank continued to explore multi-year lows yesterday with the share price declining to $A22.95. This coincided with the Reserve Bank of Australia emergency benchmark rate cut from 0.75% to 0.5%, combined with the agreement of the big banks to pass all of this rate cut onto their customers.

Traditionally lowering the base interest rate has been seen as being bad for banks. But lowering the base interest rate may stop some marginal loans going bad. So I am not sure that this latest rate cut is bad for banks at his point in the business cycle. An uncertain economic outlook is negative for growth. But I would argue that the big Aussie banks are not priced for growth at the moment.

I view bank shares in 2020 as a kind of 'bond alternative'. You are primarily in there for the dividend payout, with no expectation of capital growth. Looking after the Westpac customers that have loans I would see as increasing the security of the 'underlying bond'. So I see the cut in base interest rates as good for WBC shareholders at today's prices.

SNOOPY

[Snoopy]

Subsidiary Treatment: Consolidating the financial statements involves combining the firms' income statements and balance sheets together to form combined statements, from the parent's perspective. But this does not preclude any subsidiary from publishing their own set of accounts that are separate from the parent,




Associate Treatment: The equity method does not combine the subsidiary's accounts in the parent's statements. But it accounts for the subsidiary as an 'investment asset' and accounts for any earnings proportionate to the parent's stake in the subsidiary that is received from the subsidiary as 'Other income'. Actual dividends received have to be subtracted from any notional proportional income, as dividends received are separately accounted for under 'Non-interest income' in the income statement.




Available for Sale

From AR2019 p175

"These equity securities are measured at fair value with unrealized gains and losses recognised in 'Other Comprehensive Income' except for dividend income which is recognised in the income statement"


Pendal (was BTIM) Shares Held by Westpac




Pendal Dividend to Westpac (recognised in Westpac income statement)
Capital Revaluation Gain (Loss): Pendal over FY
Pendal as Associate Book Value EOFY
Book Value: Pendal as Available For Sale EOFY
Market Value: Pendal as Available For Sale EOFY


FY2014$42.568m (1)
$0m
N/AN/AN/A


FY2015$60.771m
$1,036m
$756m (2)
N/AN/A


FY2016$34.060m
$0m
$718m (3)
N/AN/A


FY2017$37.225m
$262.5m
N/A
$340.5m (4)$341m


FY2018$12.523m
($69.6m)
N/A
$280.1m (5)$271m


FY2019$15.576m
($43.1m)
N/A
$227.1m (6)$228m



Notes

(1) This figure is not found separately in the Westpac AR2014 on the income statement. This is because income from Pendal (or BTIM as it was called then) is subsumed in a whole list of income from 'controlled entities (that) are not wholly owned' (AR2014 p276). The actual BTIM earnings figures in the Westpac report are subsumed in the parent 'BT Financial Group' figure of $2,224m (AR2014 p257,258). The figure in the above table is instead calculated from the BTIM Annual Report for FY2014, knowing the percentage of that company owned by Westpac. At EOFY2014, BTIM was still a 61% owned subsidiary of Westpac. As a majority controlled subsidiary, the independent market capital value of BTIM is not adjusted for annually in the Westpac accounts.

(2) A gain resulted from a Pendal sell down to a 31% holding, in the FY2015 financial year, on 23rd June 2015. This gain occurred when this entity went from from 'subsidiary' to 'associate'. The pre-tax figure of $1,036m ('Business disposed of during the year ending 30th September 2015' AR2016 p222) was documented as being recognised in 'Non-interest Income' (note 4) in the previous year column, retrospecting FY2015, as most of the $1,041m figure listed (AR2016 p134). The after tax gain as a result of the sale would have been: $1,036m x 0.7 = $725m

The post sale carrying value of the remaining Westpac holding in BTIM of $756m in the above table may be found in AR2016 p222, as a retrospective figure for FY2015.

(3) For FY2016 (AR2016 Note 35 'Investment in Subsidiaries and Associates' p222), we read the carrying value of the remaining 31% of Pendal shares owned by Westpac at EOFY2016 to be $718m, This investment was initially recognised at 'fair value' due to loss of control of a subsidiary (in this case after Westpac sold down their controlling shareholding) in FY2019. Subsequently over FY2016, the value increased or decreased each year by the Group's share of the associates profit (or loss). Furthermore dividends received from this associate in exceeded of profits for the year. And that has meant a net reduction in the book value of this associate investment.

We know the number of Pendal shares held by Westpac at EOFY2016 was 90.814m (Pendal AR2016 p125). So we can work out the average 'price per share' on the books:

$718m / 90.814m = $7.91 per share.

The market closing price of Pendal at EOFY2016 was $8.89. So the underlying market value of Westpac's stake in Pendal at EOFY2016 was:

$8.89 x 90.814m = $807m

(4) We now move on to the subsequent FY2017 Pendal sell down by Westpac. A gain occurred here when Westpac's Pendal shareholding was partially sold and the balance of the shareholding retained went from being an 'Associate' to an 'Available for Sale' asset.

The 26th May 2017 'sell down' of approximately 21% of Pendal left a residual holding of approximately 10% ('approximately' because shares issued during the year as part of Pendal executive salary packages means the percentage of shares held by Westpac can change, even if Westpac sells no Pendal shares). The carrying value of Westpac's Pendal shares before the May sell down was $713m (AR2017 p227).

$713m / 90.814m = $7.85 per share.

Why the $5m drop in book valuation from the FY2016 end of year figure? The accounts (AR2017 p227) tell us it is mostly a change in fair value adjustment on the day of acquisition. I cannot explain this apparently retrospective change.

Of the $713m of shares on the books, $417m of that value was sold and $242m retained. The shares remaining and reclassified as 'Available for Sale' amounted to:

$242m / 30.814m = $7.85 per share (remaining balance, book value prior to sale).

However the sales process crystallised returns much higher than book value. The shares remaining now had a market value of $375m (p227 AR2017).

$375m / 30.814m = $12.17 per share (remaining balance, at new book value).

No dividends were paid on these shares for the remainder of FY2017 following them being reclassified as 'Available for Sale' investments.
By EOFY2017, the share price of those remaining Pendal Shares had revalued to $11.05.

$11.05 x 30.814493m = $340.5m

The value of the remaining approximately 10% stake in Pendal, listed as part of the 'Available for Sale' equity investments should total $340.5m in the annual report. This is because now the shares are being classified as 'Available for Sale', that the value on the Westpac books should reflect the market price of these Pendal shares. The actual total of 'Available for Sale' 'Equity Securities' is $465m (AR2017 p151). But as that figure may contain other equity stakes in other investments, it is not inconsistent with the $340.5m Pendal stake figure that I have reported here.

Concomitant with these changes in capital value is the associated change in 'Other Comprehensive Income' for the period. This includes an unrealized gain from 'before the date of the sale' to the 'end of year value' on the residual 'Available for sale' Pendal Shares of:

$340.5m - $242m = $103.5m. (Change in value of the retained shareholding from the start of the year to the end of the year)

We must add to this the realised gain on the 19% stake sold:

$630m - $471m = $159m. (Change in value of the retained shareholding from the start of the year to the time of the share sell down)

This adds to a total profit from the Pendal sell down of:

$105m + $159m = $262.5m.

The actual figure listed in the annual report as 'Net gains on sale of Associates' is $279m (AR2017 p139). This figure is not inconsistent with my calculated total profit from the Pendal sell down. It is possible that this figure includes other associates that were sold down over FY2017.

(5) At EOFY2018 the Pendal share price was $8.79. This represents a capital dollar value of:

$8.79 x 30.814493m = $270.859m

So the capital loss for the year on the Pendal stake was: $270.9m - $340.5m = -$69.6m


Westpac's share of Pendal's 'Total Comprehensive Income' for the year was $21.741m (refer my post 179 on this thread). Subtract from that the corresponding period dividend money paid out to WBC during the year of $12.523m (refer my post 164 on this thread). This gives the incremental 'retained earnings value' ( $21.741m - $12.523m = $9.218m ) that must be added to the book value of the asset.

Change in book value of Pendal shares = $270.9m - $340.5m + $9.2m = -$60.4m

OR $340.5m - $60.4m = $280.1m. This is still consistent with having an end of year total 'Available for sale' equity securities balance of $384m (AR2018, p172), assuming there are other equity securities of some $104m on the books to make up the difference.


(6) At EOFY2019 the Pendal share price was $7.39. This represents a capital dollar value of:

$7.39 x 30.814493m = $227.719m

So the capital loss for the year on the Pendal stake was: $227.719m - $270.859m = -$43.140m

Westpac's share of Pendal's 'Total Comprehensive Income' for the year was $14.993m (refer my post 179 on this thread). Subtract from that the corresponding period dividend money paid out to WBC during the year of $15.576m (refer my post 164 on this thread). This gives the incremental 'retained earnings value' ( $14.993m - $15.576m = -$0.583m ) that must be subtracted from the book value of the asset. It is subtracted because in this unusual circumstance, the dividend payout exceeded the dividend paying company's earnings.

Change in book value of Pendal shares = $227.719m - $270.859m - $0.583m = -$43.723m

OR $270.859m - $43.723m = $227.136m.

The 'Available for Sale' equity securities balance of $134m (AR2019, p176). What can explain this discrepency?

The accounting standard for reporting these matters changed over the year, with reporting now under AASB9. I don't understand how the equity securities balance in the 'parent entity' is calculated. But given it was $67m at EOFY2018 (AR2018 p172) and $66m at EOFY2019 (AR2019 p176), this indicates that in the grand picture of things very little has changed. My guess is that at the 'Consolidated' level, this 'missing' equity securities balance has been moved somewhere else within the consolidated accounts. But at the time of writing this, I don't know where!

EDIT: it now appears the Pendal shares have been transferred to "Trading Securities and financial assets measured at FVIS" (my post 227 on this thread).

(7) Calculation of Market Value of 'Available for Sale' Pendal Asset

FY2017

$11.05 x 30.814m = $341m

FY2018

$8.79 x 30.814m = $271

FY2019

$7.39 x x 30.814m = $228m

The purpose of the above calculations is to contrast the 'market value' of what value of Pendal remains on the books to the 'book value'. Why are they different? Because the book value of Pendal dividend has had the retained earnings for the year added to it, less the amount of retained earnings paid out as dividends. These changes are in addition to any change in the market value of the shares over the year which also must be accounted for, By contrast the market value of the Pendal shares is just that, un-corrupted by any earnings adjustments. And it is the market value that WBC is likely to get if/when they sell.

(8) AASB9 (on 'Financial Instruments') has been adopted from FY2019. This has replaced the previous reporting standard AASB 139 for reporting on all 'Investment Securities' balances. From FY2019 'Available for Sale Securities' are regrouped for balance sheet purposes as part of one category under the 'Investment Securities' banner (AR2019 p138 & p175). Just like under the previous 'Available for Sale Securities' banner, 'Investment Securities' include 'Debt Securities' and 'Equity Securities'. Just like before it is only the latter 'Equity Securities' sub category that is of interest with respect to Pendal shares. Total shares available for sale (including the Pendal stake?) amount to $134m (AR2019 p176).

EDIT: it now appears the Pendal shares have been transferred to "Trading Securities and financial assets measured at FVIS" (my post 227 on this thread).

SNOOPY

[peat]

now trading very close to NTA.

(which I guess has now changed a fair bit)

[Grimy]

ANZ quite a bit under NTA (which has probably also changed quite a bit!).

[peat]

ANZ quite a bit under NTA (which has probably also changed quite a bit!).

yes I saw that as well. Of course recessions mean a lot more people default but I suspect long term value is coming into play soon if not already at these prices.

[Bobdn]

I see in the absolute depths of the 2008/09 financial crisis wbc nzx was $18.60 or there abouts and today the share price is under $17 NZD. Are things just getting a little overdone here? I was quite happy to pay $28 a share awhile back but balk at the idea of purchasing something with a 40 per cent discount :)

[Grimy]

I was quite happy to pay $28 a share awhile back but balk at the idea of purchasing something with a 40 per cent discount :)
Same here. Amazing what a difference a few weeks make!
I'm certainly keen to get some more (and ANZ), but holding off for now. Perhaps......

[bottomfeeder]

Yeah me too. What a difference a week or two makes. I was buying at $19 but now am wondering if $16 is too much. Still I figure buy on the way down. If it goes up again you will make money if it goes bust all the money in the world will be just about worthless anyway. But where is the bottom nobody knows. I have far too much invested in Westpac, as well as have lost far too much on paper as well to abandon it now.

[bottomfeeder]

Well something strange. Last sale on ASX at aud $14.53. Yet NZX opens ths morning strongly with reasonable trades at nzd $15.65. I know there are exchange rate differences but we are at near parity at .98 cents. Looks like someone short selling on ASX to bring the price down, and then cleaning up the NZ market at slightly higher prices. Something is afoot. If true I would call it market manipulation. I am sure overseas entities would love to secure one of the big four banks. I guess we will see a Notice being giled not to long away.

[peat]

Well something strange. Last sale on ASX at aud $14.53. Yet NZX opens ths morning strongly with reasonable trades at nzd $15.65. I know there are exchange rate differences but we are at near parity at .98 cents. Looks like someone short selling on ASX to bring the price down, and then cleaning up the NZ market at slightly higher prices. Something is afoot. If true I would call it market manipulation. I am sure overseas entities would love to secure one of the big four banks. I guess we will see a Notice being giled not to long away.

that last sale was yesterday, since then mkts have stabilised so NZ price doesn't need to reflect Aus close anymore.... its very dynamic out there!!

[macduffy]

that last sale was yesterday, since then mkts have stabilised so NZ price doesn't need to reflect Aus close anymore.... its very dynamic out there!!

Yes, and I wouldn't take too much notice of WBC trading on NZX. Tone is set from Aussie a couple of hours later and volume on NZX is thin by comparison, at the best of times.

[Snoopy]

Dividends Paid to Westpac by Pendal Group (PDL.ASX)


When a company has an 'associate' stake in another, dividends from that associate reduce the book value of the associate stake. But alongside that effect, associate profits -in proportion to the share of the associate held- increase the value of the associate stake. It is that share of associate profits that I wish to table here

'Westpac' share of Pendal dividend (column 5) figures are from my post 164.



Financial Year
Pendal Total Comprehensive Income
Westpac Pendal Holding EOFY
Westpac Share of Pendal 'NPAT'
less Westpac Share of Pendal dividend
equals Associate (Pendal) Annual Valuation Adjustment


2014

60.76%



2015
$186.691m
31.04% (from 23/06/2015)
$15.718m
$0m
$15.718m


2016
$58.981m
29.54%
$17.423m
($34.060m)
($16.637m)


2017
$154.698m
8.99% (from 26/05/2017) (1)
$34.637m
($37.225m)
($2.588m)


2018
$224.361m
9.69%
$21.741m
($12.523m)
$9.218m


2019
$156.994m
9.55%
$14.993m
($15.576m)
($0.523m)



(1) Note 'sale of stake' date is one day after the ex-dividend date.

Sample Calculations

FY2015

1/ Split year into two 'equity stake' periods: 266days + 99days = 365days
2/ Split profit into two periods: $136.054m + $50.637m = $186.691m
3/ Work out Westpac share of profit after Pendal becomes an Associate:

(0 x $136.054m) + (0.3104 x $50.637m) = $15.718m

FY2016

1/ Work out Westpac share of profit:

(0.2954 x $58.981m) = $17.423m

FY2017

1/ Split year into two 'equity stake' periods: 238days + 127days = 365days
2/ Split profit into two periods: $100.872m + $53.826m = $154.698m
3/ Work out Westpac share of profit:

(0.2954 x $100.872m) + (0.0899 x $53.826m) = $34.637m

SNOOPY

[bottomfeeder]

I think someone is accumulating WBC. Last sale in ASX yesterday was aud $16.50 or nzd $16.80. This morning on NZX has buyers at $17.60. Now thats quite a difference for market cap. We in NZ are not price setters, but follow the buy/sell on the ASX. Now I have been trading these for a few years, and never has the NZX been a price setter before the ASX opens.

[macduffy]

I think someone is accumulating WBC. Last sale in ASX yesterday was aud $16.50 or nzd $16.80. This morning on NZX has buyers at $17.60. Now thats quite a difference for market cap. We in NZ are not price setters, but follow the buy/sell on the ASX. Now I have been trading these for a few years, and never has the NZX been a price setter before the ASX opens.

A similar situation with ANZ. NZX closed at $18.00 (from memory) last night and ASX $16.96. I took this to be a timing difference and of course ANZ on NZX trades fairly thinly. I expected to see a correction this morning but ANZ up marginally to $18.06 so far on NZX.

Edit: Both stocks seem to have sorted out the forex relativity issue now!

[Tomtom]

I note ANZ CEO Antonio Watson saying that deferred home loans are treated as 'still performing' by the bank. Actually the Reserve Bank has issued guidance to banks that for borrowers taking advantage of COVID-19 mortgage deferrals, the loans should be treated as performing and not in arrears for capital purposes. Keep a very, very close eye on this as a shareholder there is going to be quite some temptation to hide NPLs in that portfolio so they don't have to be reclassified.

[macduffy]

Auditors will earn their fees on this. Not to mention risking their hard earned reputations if they do a shoddy job.

Disc: Not a member of that profession but a shareholder in WBC and ANZ.

[stoploss]

I note ANZ CEO Antonio Watson saying that deferred home loans are treated as 'still performing' by the bank. Actually the Reserve Bank has issued guidance to banks that for borrowers taking advantage of COVID-19 mortgage deferrals, the loans should be treated as performing and not in arrears for capital purposes. Keep a very, very close eye on this as a shareholder there is going to be quite some temptation to hide NPLs in that portfolio so they don't have to be reclassified.

Normally someone taking the deferral option would be marked with a hardship flag , which would be reported to credit agencies. So I understand currently we are in unchartered waters , but it is at odds with normal porcudure for these to be classified as "still performing"

[traineeinvestor]

A similar situation with ANZ. NZX closed at $18.00 (from memory) last night and ASX $16.96. I took this to be a timing difference and of course ANZ on NZX trades fairly thinly. I expected to see a correction this morning but ANZ up marginally to $18.06 so far on NZX.

Edit: Both stocks seem to have sorted out the forex relativity issue now!

Okay, this is something I've never quite managed to get straight in my own mind:

WBC shares listed in Australia pay dividends with full Australian franking credits.

WBC shares listed in New Zealand pay dividends without full New Zealand imputation credits.

Which means, in theory, that WBC shares listed in Australia are more valuable to Australian shareholders than WBC shares listed in New Zealand are to New Zealand shareholders.

The fact that Australian marginal tax rates are higher than New Zealand's makes the difference even bigger (and Australia's super fund regime compounds that factor).

So, WBC should trade higher on ASX than on NZX but then there's the ability to move shares between the NZ and Au registers at nil cost (although with some delay) which could, in theory, be used to arbitrage the valuation difference.

Which all seems very logical until it occurs to me that the movement would largely be one-way until the NZ register runs out of WBC shares or liquidity dries up completely.

I'm sure I'm missing something obvious but I can't for the life of me figure out what.

[macduffy]

Two points:

In my experience, neither ANZ nor WBC pay "full" Australian franking credits nor NZ imputation credits on their dividends. Such are limited by a number of factors of which the extent of profits earned in each country is one.

The facts of time differences for trading; fluctuating exchange rates; relative liquidities and demand in each country make trying to arbitrage the two a bit of a lottery. The delay in making a shunt from one register to the other adds to the problem.

[stoploss]

Two points:

In my experience, neither ANZ nor WBC pay "full" Australian franking credits nor NZ imputation credits on their dividends. Such are limited by a number of factors of which the extent of profits earned in each country is one.

The facts of time differences for trading; fluctuating exchange rates; relative liquidities and demand in each country make trying to arbitrage the two a bit of a lottery. The delay in making a shunt from one register to the other adds to the problem.

Be alright if you were a fund manager and had stock on both sides of the Tasman .

[traineeinvestor]

Two points:

In my experience, neither ANZ nor WBC pay "full" Australian franking credits nor NZ imputation credits on their dividends. Such are limited by a number of factors of which the extent of profits earned in each country is one.

The facts of time differences for trading; fluctuating exchange rates; relative liquidities and demand in each country make trying to arbitrage the two a bit of a lottery. The delay in making a shunt from one register to the other adds to the problem.

Thanks for the response but that doesn't quite fit with my own experience - after the old Westpac Trust shares became WBC shares on NZX, I found that there was always NZ NRWT deducted (meaning the dividends were never fully imputed in NZ) but once I shifted my shares to the ASX there was never any NRWT deducted (meaning the dividends have always had at least 30% franking credit).

[Snoopy]

Okay, this is something I've never quite managed to get straight in my own mind:

WBC shares listed in Australia pay dividends with full Australian franking credits.

WBC shares listed in New Zealand pay dividends without full New Zealand imputation credits.


Correct but not complete.

WBC shares listed in Australia pay dividends with partial NZ imputation credits attached.

WBC shares listed in New Zealand pay dividends with full Australian franking credits attached.

Of course, you don't hear much about that. Australian domiciled WBC shareholders can't use NZ imputation credits. NZ domiciled WBC shareholders can't use Australian franking credits. Both are in almost all circumstances worthless to their respective shareholders. That doesn't mean they don't exist though.

Consider the case of an NZ domiciled investor who moves to Australia early in the financial year. That could mean they become an Australian taxpayer. In that situation Australian franking credits earned in New Zealand with shares on the NZ share register could be claimed in Australia.



Which means, in theory, that WBC shares listed in Australia are more valuable to Australian shareholders than WBC shares listed in New Zealand are to New Zealand shareholders.


On a pure dividend yield basis you are correct. However investors don't invest purely to gain dividend yield. NZ investors also invest outside the NZX to gain exposure to business sectors and markets that are not available within the NZX.



So, WBC should trade higher on ASX than on NZX but then there's the ability to move shares between the NZ and Au registers at nil cost (although with some delay) which could, in theory, be used to arbitrage the valuation difference.


There is no 'theory' about it. What you outline is what happens. There is no difference between WBC shares listed on the NZX and WBC shares listed on the ASX.



Which all seems very logical until it occurs to me that the movement would largely be one-way until the NZ register runs out of WBC shares or liquidity dries up completely.

I'm sure I'm missing something obvious but I can't for the life of me figure out what.

Hopefully I have filled in what you are missing.

SNOOPY

discl: hold WBC (on the NZX if it matters).

[Snoopy]

Thanks for the response but that doesn't quite fit with my own experience - after the old Westpac Trust shares became WBC shares on NZX, I found that there was always NZ NRWT deducted (meaning the dividends were never fully imputed in NZ) but once I shifted my shares to the ASX there was never any NRWT deducted (meaning the dividends have always had at least 30% franking credit).


NRWT or 'Non Resident Withholding Tax' is a different issue. IIRC NWRT in NZ has always been deducted at a lesser rate than the prevailing NZ company tax rate. NWRT is not connected to imputation, because imputation credits are not available for non-residents. Many NZ companies pay a bonus dividend to overseas shareholders: in effect a payment which conveniently offset the effects of NWRT for overseas holders.

Once 'Westpac Trust', -which was actually a property investment with a 1:1 equivalence to WBC shares as regards dividend rate- was dissolved, then those NZ shareholders of New Zealand company 'Westpac Trust' became NZ based shareholders of Australian company WBC. Being an Australian company, WBC didn't have the New Zealand tax loophole of being able to pay a supplementary dividend to overseas shareholders in the NZ register to offset any NRWT that might have been payable by overseas shareholders.

Different governments have different policies on withholding tax. My experience is as a New Zealander holding Australian shares on the ASX. In this instance, and where a company has fully franked dividends, then no extra withholding tax (you can argue that the unusable franking credit is also a withholding tax) deducted from Australia. It is up to me to pay any NZ tax obligations on these dividends once that money hits my bank account. I think this aligns with your experience Traineeinvestor?

I have never been a non-NZ resident holding NZX listed, but Australian domiciled, shares. So I can't comment directly on your earlier experience of holding WBC shares on the NZX as an overseas resident Traineeinvestor.

SNOOPY

[Bjauck]

Okay, this is something I've never quite managed to get straight in my own mind:

WBC shares listed in Australia pay dividends with full Australian franking credits.

WBC shares listed in New Zealand pay dividends without full New Zealand imputation credits.

Which means, in theory, that WBC shares listed in Australia are more valuable to Australian shareholders than WBC shares listed in New Zealand are to New Zealand shareholders...

All shareholders are treated the same whether they have the Australian or NZ listed shares. The NZ and Australian imputations credits are attached to all dividends no matter where the shareholders reside and no matter where their shares are listed.

Only NZ residents can utilise their share of the NZ Imputation credit. As NZ business represents a smaller percent of the Group turnover, then we can only expect an imputation credit per share commensurate with that.

That is a drawback of NZ business being run by overseas companies. Less of the total imputation credit for NZ tax tax paid ends up being utilised by NZ resident shareholders. Overseas shareholders get credits, but cannot utilise them.

[traineeinvestor]

@ Snoopy - Thanks for the detailed response. I was aware that WBC NZ listed shares carry partial imputation credit (which is why is phrased it as "do not carry full imputation credits). I'm also aware that imputation/franking credits have no value outside NZ/Au respectively. Your reminder that NZ investors want international exposure combined with the partial imputation credits appears to be the missing piece and explains why there hasn't been a steady migration of WBC shares from NZX to ASX – I guess I've been away too long.

@ Snoopy and Bjauck – As a non-resident shareholder, imputation and franking credits do matter to me. If there's no imputation credits (provided via a paper supplemental dividend) on NZ shares I lose 30% to NRWT. The same happens in Australia with franking credits. If I understand correctly, a company must utilise its available imputation credits to pay a supplemental dividend to overseas shareholders to avoid deducting NRWT.

The imputation/franking of dividends is one of the first things I look at when evaluating an investment. This is why, when units in Westpac Trust were swapped out for NZX listed WBC shares I shifted my shares to ASX.

Thanks to you both for taking the time to reply.

[traineeinvestor]

The UK regulator has issued an edict banning the large banks and building societies from paying dividends in 2020 (including already declared dividends from 2019 profits), conducting share buy backs or paying staff bonuses.

Any thoughts on whether the Australian regulator might do the same?

[dabsman]

The UK regulator has issued an edict banning the large banks and building societies from paying dividends in 2020 (including already declared dividends from 2019 profits), conducting share buy backs or paying staff bonuses.

Any thoughts on whether the Australian regulator might do the same?

https://i.stuff.co.nz/business/120754357/banks-not-allowed-to-pay-dividends-to-shareholders-until-recovery-rbnz-announces

[macduffy]

That's in respect of dividends paid by NZ banks to their Australian parent banks. Now we wait to see what, if any, dividends the parents pay to their shareholders, including NZ shareholders of course.

[Tomtom]

Interesting, many people have seen bank shares as consistent dividend payers and invested in them for this reason. So will banks just use buybacks or just declare ex-dividends as per usual and set the payable date forwards a year?

[traineeinvestor]

Interesting, many people have seen bank shares as consistent dividend payers and invested in them for this reason. So will banks just use buybacks or just declare ex-dividends as per usual and set the payable date forwards a year?

I'm pretty sure there won't be any buy-backs if dividends aren't allowed.

Since dividends are usually paid based on past profits and management's future expectations for capital needs etc, I would be very surprised if they declared dividends a year in advance.

It's a real issue in Australia given that the extent to which the big 4 banks have become the staples of self-managed retirement funds.

[macduffy]

I'm pretty sure there won't be any buy-backs if dividends aren't allowed.

Since dividends are usually paid based on past profits and management's future expectations for capital needs etc, I would be very surprised if they declared dividends a year in advance.

It's a real issue in Australia given that the extent to which the big 4 banks have become the staples of self-managed retirement funds.

And in NZ where I expect that they feature in many Kiwisaver and other managed funds.

[kiwico]

All shareholders are treated the same whether they have the Australian or NZ listed shares. The NZ and Australian imputations credits are attached to all dividends no matter where the shareholders reside and no matter where their shares are listed.

Only NZ residents can utilise their share of the NZ Imputation credit. As NZ business represents a smaller percent of the Group turnover, then we can only expect an imputation credit per share commensurate with that.

That is a drawback of NZ business being run by overseas companies. Less of the total imputation credit for NZ tax tax paid ends up being utilised by NZ resident shareholders. Overseas shareholders get credits, but cannot utilise them.

Agree completely. I have a few on both exchanges for some reason - for those that want a gander the ASX info looks this (https://www.dropbox.com/s/bq73w6wunvae1ym/WBC_ASX.png?dl=0) and the NZX like this (https://www.dropbox.com/s/o5rqyqbvhw58g3y/WBC_NZX.png?dl=0).

[Snoopy]

The 24th November 2019 Westpac press release indicates that Westpac still expect to be fined, for not having the necessary checks on some accounts. However they have rolled out the following $54m dollars worth of 'good corporate citizen' measures:

-----

1/ Funding for the International Justice Mission (IJM): Westpac will match IJM's current level of funding, investing $18 million over three years to tackle Online Sexual Exploitation of Children (OSEC) in the Philippines. This will enable IJM to expand on-the-ground initiatives in Southeast Asia to help end child exploitation.

2/ Funding for SaferKids: Westpac will match the Australian Government's current level of funding for its SaferKids partnership with Save the Children, UNICEF and The Asia Foundation, investing $6 million over six years to raise awareness of Online Sexual Exploitation of Children (OSEC) and support programs to protect children in the Philippines.

3/ Prevention: Westpac will seek the guidance of industry experts, through the convening of an expert advisory roundtable, to develop a program of actions to support the prevention of online child exploitation. Westpac will provide funding of up to $10 million per year for three years to implement these recommendations

-----

In house,

1/ Westpac have closed their "Westpac Australasian Cash Management Product" and "LitePay international funds transfer system". These were two platforms where funds could be transferred with little accountability.

2/ Westpac intend to hire an additional 200 people to add to their financial crime resourcing team. This team has already been boosted by 325, to 750 people over the last three years.

3/ Westpac will invest $25 million to improve cross-border and cross-industry data sharing and analysis to better support regulators and authorities to fight financial crime

Those financial <script src="https://securepubads.g.doubleclick.net/gpt/pubads_impl_2020032401.js" id="gpt-impl-0.981356852904373" nonce=""></script>commitments add up to $79m, excluding Westpac's own incremental internal costs.

The 25th November 2019 Westpac press release contains more details on Westpac's costs for the full support of the anti-pedophile program:

"Westpac has made a number of commitments including to improve its financial crime program, support industry initiatives to enhance financial crime monitoring and provide additional support and resources to organisations that are working to eradicate child exploitation. We estimate these commitments will increase expenses by up to $80 million (pre tax) in FY20 when the majority will be incurred or provided for. These expenses will be included in cash earnings and treated as notable items."

The 'notable items' comment is made in relation to the whole thing being a 'non-operational matter." I would not include it as part of 'normalised earnings'.

I am not sure what kind of fine Westpac may expect as a result of their prior inactions, to be offset by their subsequent make good efforts at least in a judge's eye. I don't think they will get away with a wet bus ticket though. But given that Westpac was a conduit for crime rather than doing the crime themselves, I wonder if it will be somewhat in the order of $20m? That would see Westpac face a total cost of $80m + $20m = $100m for the whole matter. $100m sounds like a good 'headline punishment' to face. Anyone know how this figure compares with existing court precedents?


According to the comment at the end of this article, my total $100m paedophile fine settlement could be some way out:

https://www.finextra.com/newsarticle/34814/westpac-faces-hefty-fines-for-breaching-anti-money-laundering-rules

"23 million breach occasions @ A$17 - A$21 million penalty per breach occasion is A$391 trillion - A$ 483 trillion."

To put that into perspective, total shareholder funds on hand at EOFY2019 was $65 billion. So potentially WBC could be fined over:

391/0.65 = 600

times the amount of shareholder funds on the balance sheet! That sounds like crazy stuff that would immediately collapse the bank. Hyperbolic surely?

SNOOPY

[Snoopy]

According to the comment at the end of this article, my total $100m paedophile fine settlement could be some way out:

https://www.finextra.com/newsarticle/34814/westpac-faces-hefty-fines-for-breaching-anti-money-laundering-rules

"23 million breach occasions @ A$17 - A$21 million penalty per breach occasion is A$391 trillion - A$ 483 trillion."

To put that into perspective, total shareholder funds on hand at EOFY2019 was $65 billion. So potentially WBC could be fined over:

391/0.65 = 600

times the amount of shareholder funds on the balance sheet! That sounds like crazy stuff that would immediately collapse the bank. Hyperbolic surely?


My best guess so far is that Westpac will be facing a fine of between $A20m and $A483,000m

Can I narrow that down a bit further?

https://qz.com/1754928/australias-westpac-bank-sued-for-violations-enabling-pedophilia/

"Austrac’s current record fine was issued against Commonwealth Bank for A$700 million. But its number of violations was less than 2% of Westpac’s 23 million total."

So let's extrapolate Westpac's potential fine based on their errant transaction level.

$700m / 0.02 = $35,000m. Hmmmm

"Overall, Austrac found 12 customers who together had sent more than 3,000 payments worth around $340,000 to child abusers in the Philippines and elsewhere in Southeast Asia."

That is a rate of 250 incidents per rogue customer.

Of the 23m breaches noted at Westpac, then that would imply 92,000 rogue customers.

Using an A$17-A$21 million penalty per rogue customer (a punishment rate I just made up), I get an overall fine of $1,564b to $1,932b. That several orders of magnitude larger than the $0.700b CBA fine. But the banking environment has changed in the Covid-19 environment. A fine of materially more than $700m at this time could cause WBC and, as a consequence, the rest of the banking system in Australia to become unstable. Would a court risk that? Or would the legal system carry on down their path regardless of the economic consequences of any fine imposed?

SNOOPY

[Snoopy]

WBC


Annual Net Impaired Asset Expense (A)Total Impaired Loan and Credit Commitment Provision (B)(A)/(B)Total Loans (impairment (B) included) (C)(B)/(C)EBT (before impaired asset exposure) (D) (A)/(D)


FY2019$794m$3,913m (*1)20%$718,683m0.5%$10.543m7.5%




(*1) Includes a $980m increment from the adoption of accounting standard AASB9 (on Financial Instruments, including impairment). AASB9 includes a new 3 level impaired debt assessment classification as part of the newly adopted ECL (Expected Credit Loss) model.


Banks must hold capital to support their loans. For Westpac the minimum capital required is calculated as 8% of total 'risk weighted assets'. The concept of 'risk weighted assets' is that some assets are easier to sell, in the event of a loan going bad, than others. So it is good for a bank to stack their loan book with loans that are relatively easy to liquidate in the event of the customer being unable to repay the loan at some time in the future.

How to measure the ease with which a loan can be liquidated? If we define a standard loan with a risk weighted adjustment factor of 1....

(aside question: don't ask me why standardised loans have a RWA of 0.93 in the table below _ I would love to find out!)

...and an 'another category loan' to have an RWA factor of 0.25, that means the 'another category loan' is less risky. To reflect this lower risk, the bank is happy to hold four times the dollar value of the 'another category loan' in place of one times the dollar value of 'standardised loan'.

From p13: https://www.westpac.com.au/content/dam/public/wbc/documents/pdf/aw/ic/Westpac_Pillar_3_Report_December_2019.pdf (except the last column that I have calculated)

Westpac averaged Risk Weighted Assets EOFY2019 ($m)




Asset Categories
Risk Weighted Assets {A}
Exposure at Default {B}
Averaged Risk Weighted Factor {A}/{B}


Corporate
74,807 139,1730.54


Business Lending
35,47054,5700.65


Sovereign
2,06890,9600.023


Bank
8,33928.7610.29


Residential Mortgages
131,629559,0180.24


Australian Credit Cards
5,08917,5410.29


Other Retail
12,39515,9510.78


Small Business
16,09033,3650.48


Specialised Lending
55,26265,5530.84


Securitized
5,74925,7740.22


Standardised
20,96622,5120.93



--------------


Total
367,8641,054,1780.35



If we look at the largest category of loans, 'Residential Mortgages', we can see that the RWA value is 0.24. Does this mean that a 'Residential Mortgage' is only about a quarter as risky as a standard loan? Unfortunately the answer isn't so simple, because under the Basel 3 convention, the riskiness of a residential loan is tied to the amount of equity that the homeowner has in their home.



Loan to Value BandRWA Factor


Below 50%20%


50%< <60%25%


60%< <80%30%


80%< <90%40%


90%< <100%50%


>100%70%



One way to interpret that 24% RWA figure for residential mortgages at EOFY2019, is that it is equivalent to having the outstanding balance yet to be repaid on each mortgage lying between 40%-50% of the value of the residential property (work backwards in the table above aligning the AWF figure with the home equity held). Of course it is extremely unlikely in practice if all residential mortgages held by Westpac fall into this single loan category. It is likely that Westpac hold residential mortgages in all of the above 'variable equity' categories. The big 'capital holding risk' to Westpac is to ask the question "How many property loans are in the 0-10% equity bracket?" Because if the property market turns sour, it is those customers that will largely determine how much the risk adjusted loan balance base increases. The increase/decrease in the 'risk adjusted earnings base' then determines how much extra/less capital the bank must hold.

SNOOPY

[Snoopy]

From p13: https://www.westpac.com.au/content/dam/public/wbc/documents/pdf/aw/ic/Westpac_Pillar_3_Report_December_2019.pdf (except the last column that I have calculated)

Westpac averaged Risk Weighted Assets EOFY2019 ($m)




Asset Categories
Risk Weighted Assets {A}
Exposure at Default {B}
Averaged Risk Weighted Factor {A}/{B}


Residential Mortgages
131,629559,0180.24



If we look at the largest category of loans, 'Residential Mortgages', we can see that the RWA value is 0.24. Does this mean that a 'Residential Mortgage' is only about a quarter as risky as a standard loan? Unfortunately the answer isn't so simple, because under the Basel 3 convention, the riskiness of a residential loan is tied to the amount of equity that the homeowner has in their home.



Loan to Value BandRWA Factor


Below 50%20%


50%< <60%25%


60%< <80%30%


80%< <90%40%


90%< <100%50%


>100%70%




Here are the results of a 'stress test' I have performed on Westpac residential property loans. The aim of the test is to answer the question: How much incremental capital need Westpac hold should residential property prices decline by 10%?

LVR Loan Position at EOFY2019



LVR %
0< <60
60< <7070< <8080< <9090< <100
> 100Total


Residental Mortgage Balance
$257,596m$83,853m$100,623m$67,082m$22,361m
$9,503m$559,018m


RWF
5/6*0.2+1/6*0.25=0.20830.30.30.40.5
0.7N/A


Risk Weighted Mortgages
$53,657m$25,156m$30,196m$26,833m$11,181m
$6,652m$162,675m

[/TR]


The actual given risk weighted figure for residential mortgages was $136,689m (Westpac Pillar 3 Report December 2019 p10). That means my calculated figure of $167,675m is too high. The two most likely reasons for this discrepancy are:

1/ I have assumed more mortgages are in the 50-60% LVR range than is really the case. This cannot be easily checked because my 50-60% LVR is only a linear estimate and the real figure which WBC would know has not been publicly released.
2/ I have used the Australian LVR figures for all mortgages (Results Presentation FY2019 p93) when I know the NZ figures (Results Presentation FY2019 p129), and probably others outside of Australia, are more conservative (Results Presentation FY2019 p129) .

Nevertheless it is the change in the Risk Weighted Mortgages as a result of a 10% reduction in the value of retail property, not the absolute value that is of interest. The change in Risk Weighted Mortgages is less sensitive to any calculation errors than the absolute values, so I will continue.

A change in house prices does not change the value of a mortgage. But it does change the leverage that the house owner has on their property. I can approximate a 10% market decline by moving all the leveraged mortgages up one bracket, as in the adjusted table below.

LVR Loan Position at EOFY2019 (but with Imposed 10% Property Market Crash)



LVR %
0< <60
60< <7070< <8080< <9090< <100
> 100Total


Residental Mortgage Balance
$214,663m$42,933m$83,853m$100,623m$67,082m
$31,864m$559,018m


RWF
5/6*0.2+1/6*0.25=0.20830.30.30.40.5
0.7N/A


Risk Weighted Mortgages
$44,714m$12,880m$25,156m$40,249m$33,541m
$22,305m$178,845m

[/TR]


The difference between the risk weighted mortgage figures under the two scenarios is:

$178,845m - $162,675m = $16,170m

The amount of incremental bank capital, notionally needed to support the increase in leverage of mortgage holders, (caused by properties sinking in value) is 8% of the incremental total:

0.08 x $16,170m = $1.3billion

Note: From "Final Basel III Modelling: Implementation, Impact and Implications" by Ioannis Akkizidis and Lampros Kalyvas" page 14.

"As from 1st January 2015, the minimum Common Equity Tier 1 (CET1) was set (under Basel 3) at 4.5% while (total) Tier 1 was 6%, implying that the additional Tier 1 should be at most 1.5% of the total RWA. The minimum total capital (TC) requirement would remain unchanged in comparison to Basel II at 8%."

SNOOPY

[Snoopy]

The difference between the risk weighted mortgage figures under the two scenarios is:

$178,845m - $162,675m = $16,170m

The amount of incremental bank capital, notionally needed to support the increase in leverage of mortgage holders, (caused by properties sinking in value) is 8% of the incremental total:

0.08 x $16,170m = $1.3billion


0.08 x $16,170m = $1.3billion

This figure is not the same as the amount of new capital needed. The amount of new capital required could be less as the total does not take into account any 'buffer capital' the bank may already have on the books in anticipation of such a residential property downturn. Mortgagee sales are another way to reduce the amount of 'bank support capital' needed.

Of particular interest is how this 'potential increased capital requirement' squares off against the provision set aside under the newly adopted ECL (Expected Credit Loss) method of booking 'Expected' bad debts.

From

https://www.westpac.com.au/content/dam/public/wbc/documents/pdf/aw/ic/Westpac_Pillar_3_Report_December_2019.pdf

and on page 13, the 'Regulatory Loss for Non-defaulted Exposures' is on the books at $1.088billion for 'residential mortgages'. That is

$1.3b -$1.088b = about $200m

IOW $200m would be a ballpark figure if we had to guess any extra provisioning required should the residential property market fall by 10%. That doesn't seem much of a gap to bridge when you talk about the kind of money these 'big four' Aussie banks deal with. It could even be less (or non-existent) if some of those loans that now exceed the value of the underlying property are counted as 'in default'. ($1,642m is the amount put aside for expected losses for defaulted and non-defaulted exposures). For current Westpac shareholders, I think that is encouraging.

SNOOPY

[peat]

IOW $200m would be a ballpark figure if we had to guess any extra provisioning required should the residential property market fall by 10%. That doesn't seem much of a gap to bridge when you talk about the kind of money these 'big four' Aussie banks deal with. It could even be less (or non-existent) if some of those loans that now exceed the value of the underlying property are counted as 'in default'. ($1,642m is the amount put aside for expected losses for defaulted and non-defaulted exposures). For current Westpac shareholders, I think that is encouraging.

SNOOPY

some strong provisioning coming through today Snoops, a lot more than 200m , I'm reading 1,430m plus 140m in insurance.
Share price didn't react much though.

[Snoopy]

some strong provisioning coming through today Snoops, a lot more than 200m , I'm reading 1,430m plus 140m in insurance.
Share price didn't react much though.


I was investigating 'Residential Mortgages' only Peat. The "up to $200m" was only for that. I was also working on a 10% drop for residential property from the EOFY2019 position. If Westpac are modelling more than that as a drop for residential, then my "up to $200m" will go up.

Of course there are many more kinds of lending that Westpac do, that can go sour. I wonder what provisioning Westpac is setting aside for those?

Still in the background we have the on going "Fee for no service" saga on customer superannuation balances which I am not sure was fully provisioned for. Next, the as yet unspecified fine the courts are expected to hand down to Westpac, for facilitating some customers engaging in paedophilia paid for via Westpac platforms. The market at least knew about these two, even if the final quantum of expense is unknown.

What quantity of the write-downs today are 'new' and relate directly to the loan book?

'Insurance', in the form of Westpac's in house product, including 'mortgage repayment insurance' seems to be only offered to Australian customers. Well, it has never been offered to me as a Westpac customer in NZ anyway. Could the extra insurance write off have some connection to the just wrapping up Australian fire season?

SNOOPY

[peat]

Could the extra insurance write off have some connection to the just wrapping up Australian fire season?

SNOOPY
yes it is exactly that.

Its hard to understand how they were over $30 not that long ago.
Historic PE of under 8 now
I've been glancing through Grahams Intelligent Investor and just wondering if any of these Pillars are now meeting his requirements

[macduffy]

yes it is exactly that.

Its hard to understand how they were over $30 not that long ago.
Historic PE of under 8 now
I've been glancing through Grahams Intelligent Investor and just wondering if any of these Pillars are now meeting his requirements

Perhaps, but the E will have to be assumed to be a lot lower now.

[percy]

What do you think their forward PE will be.Under 12 ?

[bottomfeeder]

Making a provision for fines of over 1 bill, now seems a fait accompli. Company telling everyone that that is what they are prepared to pay. Surely they could have done better with that one. Perhaps said difficult to quantify, but making a provision of $500k, pending the final outcome. What dunderheads, commercially sensitive information should not be leaked.

[peat]

i just think that in some time , say 3-5 years it will be approaching the current historic PE again and will have represented good long term value at these price.

The article in the herald quoting Mark Lister saying there was good value for longer term views - although that doesn't convince me for eg AIA (tourism related) but for pillars of the financial antipodes - I think even though there are clear setbacks coming at a time of intense public dislike stoking the regulatory fire , however possibly the necessity of having strong banks will mollify the financial punishment aspect of the authorities. Who knows, but there would appear to be a lot of provisioning maybe more than will become necessary.

The state needs Westpac and ANZ to do their job of providing credit and intermediating in the system and wont want to knobble them or increase the chance of a failure or even an increase in the perception of likelihood of failure.

[Snoopy]

From p13: https://www.westpac.com.au/content/dam/public/wbc/documents/pdf/aw/ic/Westpac_Pillar_3_Report_December_2019.pdf (except the last column that I have calculated)

Westpac averaged Risk Weighted Assets EOFY2019 ($m)




Asset Categories
Risk Weighted Assets {A}
Exposure at Default {B}
Averaged Risk Weighted Factor {A}/{B}



Business Lending
35,47054,5700.65


Small Business
16,09033,3650.48



--------------


Total
51,56087,9350.59





One area that is causing me concern in this "Covid-19 market" is the amount of money that banks have loaned towards business. In particular I am thinking about those businesses not large enough to be listed on any market, yet still large, right down to SMEs (excluding traditional 'really small business' that is likely to be funded by a mortgage taken out over the proprietors home, out of sight of 'business lending' rules).

These businesses do not have externally verified credit ratings. Yet they are still a significant part of the business loan book for any bank.

I think such investments are classified under the 'Basel 3' Standardised Credit Risk Assessment Approach (SCRA). Under SCRA, there are three risk weighted loan grades: 'Grade A', 'Grade B' and 'Grade C'.

https://www.bis.org/bcbs/publ/d424_hlsummary.pdf (look on p7)

The standardised credit risk table and associated risk weighting for each of the three grades of loans is as follows:



Grade AGrade BGrade C


Risk Weightings40%75%150%


Risk Weightings (Short Term)20%50%150%


Risk Weightings (50/50 ST LT)30%62%150%



'Grade A' loans are not dependent on business cycles and economic conditions going 'just right'. 'Grade B' loans can be seriously affected by business cycles. While Grade C have 'material default risks'.

One way to interpret the 59% Risk weighting over all business loans is to think of the majority of these loan being 'Grade B' with a small percentage 'Grade A'. However, if more of each loan were directed towards 'stock for sale', then the average risk grade would be skewed more towards 'Grade B', with even a few loans classified in 'Grade C' under a 'business as usual' situation.

I am now going to produce a 'plausible' current scenario to work with. Using the format

a(RW Grade A) + b(RW Grade B) + c(RW Grade C) = 0.59

we need to solve for 'a', 'b' and 'c'. There is no unique answer to this equation. So I am going to make a couple of educated guesses and say that:

1/ In normal times business loans are precarious and 'something like' 10% are 'Grade C'.
2/ 'Around' two thirds (66%) of businesses are tied to business cycles and are 'Grade B'.

Given these two assumptions we can now calculate what proportion of business loans are 'Grade A".

a(0.3) + (0.66)(0.62) + (0.10)(1.5) = 0.59

=> a=0.1

The relative proportion of each loan grade A:B:C is therefore: 0.1:0.66:0.1

Normalising to a combined total of 100, that is the same relative proportion as: 12:76:12 OR

12% 'Grade A', 76% 'Grade B' and 12% 'Grade C'. (12% + 76% + 12% = 100%)

I am happy with that scenario, as it is not too far from my initial guesses and it sounds plausible. We now have a 'base scenario' to work from!

(0.1)(0.3) + (0.66)(0.62) + (0.10)(1.5) = 0.59

Now we can imagine a severe recession where half of all 'Grade A' loans become 'Grade B' and half of 'Grade B' loans become 'Grade C'.

0.05(0.3) + (0.05+0.33)(0.62) + (0.33+0.1)(1.5) = 0.90

0.9 is the new 'stressed' Averaged Risk Weighted factor. Now we can calculate a new 'risk weighted loan balance figure' from the existing 'exposed assets at default' figure.

The sum of the business related loan assets 'exposed at default' on the last balance date (30-09-2019) was $87,935m. So our new 'Risk Weighted Adjusted' figure is:

0.9 x $87,935m = $79,142m

This is an increase of: $79,142m - $51,560m = $27,852m

WBC requires a minimum of 8% of the incremental 'book value' of business loans on the books. So the amount of new capital WBC needs to cover off these business loans under my 'stressed business' scenario is:

0.08 x $27,852m = $2.2billion.

SNOOPY

[Snoopy]

Now we can imagine a severe recession where half of all 'Grade A' loans become 'Grade B' and half of 'Grade B' loans become 'Grade C'.

0.05(0.3) + (0.05+0.33)(0.62) + (0.33+0.1)(1.5) = 0.90

0.9 is the new 'stressed' Averaged Risk Weighted factor. Now we can calculate a new 'risk weighted loan balance figure' from the existing 'exposed assets at default' figure.

The sum of the business related loan assets 'exposed at default' on the last balance date (30-09-2019) was $87,935m. So our new 'Risk Weighted Adjusted' figure is:

0.9 x $87,935m = $79,142m

This is an increase of: $79,142m - $51,560m = $27,852m

WBC requires a minimum of 8% of the incremental 'book value' of business loans on the books. So the amount of new capital WBC needs to cover off these business loans under my 'stressed business' scenario is:

0.08 x $27,852m = $2.2billion.


Ouch!

SNOOPY

P.S. I have a feeling my stressed business scenario is too severe. I am effectively saying that close to 40% of all businesses operating in a sustainable way today will move into something approaching statuatory management. I intend to have another go with a less severe business contraction being modelled.

[nztx]

Ouch!

SNOOPY

P.S. I have a feeling my stressed business scenario is too severe. I am effectively saying that close to 40% of all businesses operating in a sustainable way today will move into something approaching statuatory management. I intend to have another go with a less severe business contraction being modelled.

Stop it Snoops .. too much more of this & I'll start having nightmares..

To balance how do you factor in for new business add ins, restructured loans, deferred loan arrangements etc ?

& there will likely be further who change banking shop for better deals elsewhere perhaps with/without added assistance

[Snoopy]

One area that is causing me concern in this "Covid-19 market" is the amount of money that banks have loaned towards business. In particular I am thinking about those businesses not large enough to be listed on any market, yet still large, right down to SMEs (excluding traditional 'really small business' that is likely to be funded by a mortgage taken out over the proprietors home, out of sight of 'business lending' rules).

These businesses do not have externally verified credit ratings. Yet they are still a significant part of the business loan book for any bank.

I think such investments are classified under the 'Basel 3' Standardised Credit Risk Assessment Approach (SCRA). Under SCRA, there are three risk weighted loan grades: 'Grade A', 'Grade B' and 'Grade C'.

The standardised credit risk table and associated risk weighting for each of the three grades of loans is as follows:



Grade AGrade BGrade C


Risk Weightings40%75%150%


Risk Weightings (Short Term)20%50%150%


Risk Weightings (50/50 ST LT)30%62%150%



'Grade A' loans are not dependent on business cycles and economic conditions going 'just right'. 'Grade B' loans can be seriously affected by business cycles. While Grade C have 'material default risks'.

One way to interpret the 59% Risk weighting over all business loans is to think of the majority of these loan being 'Grade B' with a small percentage 'Grade A'. However, if more of each loan were directed towards 'stock for sale', then the average risk grade would be skewed more towards 'Grade B', with even a few loans classified in 'Grade C' under a 'business as usual' situation.

I am now going to produce a 'plausible' current scenario to work with. Using the format

a(RW Grade A) + b(RW Grade B) + c(RW Grade C) = 0.59

we need to solve for 'a', 'b' and 'c'. There is no unique answer to this equation. So I am going to make a couple of educated guesses and say that:

1/ In normal times business loans are precarious and 'something like' 10% are 'Grade C'.
2/ 'Around' two thirds (66%) of businesses are tied to business cycles and are 'Grade B'.

Given these two assumptions we can now calculate what proportion of business loans are 'Grade A".

a(0.3) + (0.66)(0.62) + (0.10)(1.5) = 0.59

=> a=0.1

The relative proportion of each loan grade A:B:C is therefore: 0.1:0.66:0.1

That is the same relative proportion as: 12:76:12 OR

12% 'Grade A', 76% 'Grade B' and 12% 'Grade C'. (12% + 76% + 12% = 100%)

I am happy with that scenario, as it is not too far from my initial guesses and it sounds plausible. We now have a 'base scenario' to work from!

(0.1)(0.3) + (0.66)(0.62) + (0.10)(1.5) = 0.59

Now we can imagine a severe recession where half of all 'Grade A' loans become 'Grade B' and half of 'Grade B' loans become 'Grade C'.

0.05(0.3) + (0.05+0.33)(0.62) + (0.33+0.1)(1.5) = 0.90

0.9 is the new 'stressed' Averaged Risk Weighted factor. Now we can calculate a new 'risk weighted loan balance figure' from the existing 'exposed assets at default' figure.

The sum of the business related loan assets 'exposed at default' on the last balance date (30-09-2019) was $87,935m. So our new 'Risk Weighted Adjusted' figure is:

0.9 x $87,935m = $79,142m

This is an increase of: $79,142m - $51,560m = $27,852m

WBC requires a minimum of 8% of the incremental 'book value' of business loans on the books. So the amount of new capital WBC needs to cover off these business loans under my 'stressed business' scenario is:

0.08 x $27,852m = $2.2billion.

SNOOPY


Here is a second 'plausible' current scenario to work with. Using the format

a(RW Grade A) + b(RW Grade B) + c(RW Grade C) = 0.59

and filling in the numbers

(0.1)(0.3) + (0.66)(0.62) + (0.10)(1.5) = 0.59

Now we can imagine a severe recession where 20% of all 'Grade A' loans become 'Grade B' and 20% of 'Grade B' loans become 'Grade C'.

0.08(0.3) + (0.02+0.53)(0.62) + (0.13+0.1)(1.5) = 0.71

0.71 is the new 'stressed' Averaged Risk Weighted factor. Now we can calculate a new 'risk weighted loan balance figure' from the existing 'exposed assets at default' figure.

The sum of the business related loan assets 'exposed at default' on the last balance date (30-09-2019) was $87,935m. So our new 'Risk Weighted Adjusted' figure is:

0.71 x $87,935m = $62,434m

This is an increase of: $62,434m - $51,560m = $10,874m

WBC requires a minimum of 8% of the incremental 'book value' of business loans on the books. So the amount of new capital WBC needs to cover off these business loans under my 'stressed business' scenario is:

0.08 x $10,874m = $870m.

SNOOPY

[Snoopy]

Here is a second 'plausible' current scenario to work with. Using the format

a(RW Grade A) + b(RW Grade B) + c(RW Grade C) = 0.59

and filling in the numbers

(0.1)(0.3) + (0.66)(0.62) + (0.10)(1.5) = 0.59

Now we can imagine a severe recession where 20% of all 'Grade A' loans become 'Grade B' and 20% of 'Grade B' loans become 'Grade C'.

0.08(0.3) + (0.02+0.53)(0.62) + (0.13+0.1)(1.5) = 0.71

0.71 is the new 'stressed' Averaged Risk Weighted factor. Now we can calculate a new 'risk weighted loan balance figure' from the existing 'exposed assets at default' figure.

The sum of the business related loan assets 'exposed at default' on the last balance date (30-09-2019) was $87,935m. So our new 'Risk Weighted Adjusted' figure is:

0.71 x $87,935m = $62,434m

This is an increase of: $62,434m - $51,560m = $10,874m

WBC requires a minimum of 8% of the incremental 'book value' of business loans on the books. So the amount of new capital WBC needs to cover off these business loans under my 'stressed business' scenario is:

0.08 x $10,874m = $870m.



Here is a third 'plausible' current scenario to work with. Using the format

a(RW Grade A) + b(RW Grade B) + c(RW Grade C) = 0.59

and filling in the numbers

(0.1)(0.3) + (0.66)(0.62) + (0.10)(1.5) = 0.59

Now we can imagine a severe recession where 15% of all 'Grade A' loans become 'Grade B' and 15% of 'Grade B' loans become 'Grade C'.

0.085(0.3) + (0.015+0.56)(0.62) + (0.1+0.1)(1.5) = 0.68

0.68 is the new 'stressed' Averaged Risk Weighted factor. Now we can calculate a new 'risk weighted loan balance figure' from the existing 'exposed assets at default' figure.

The sum of the business related loan assets 'exposed at default' on the last balance date (30-09-2019) was $87,935m. So our new 'Risk Weighted Adjusted' figure is:

0.68 x $87,935m = $59,796m

This is an increase of: $59,796m - $51,560m = $8,236m

WBC requires a minimum of 8% of the incremental 'book value' of business loans on the books. So the amount of new capital WBC needs to cover off these business loans under my 'stressed business' scenario is:

0.08 x $8,236m = $659m.

SNOOPY

[Snoopy]

Now we can imagine a severe recession where 15% of all 'Grade A' loans become 'Grade B' and 15% of 'Grade B' loans become 'Grade C'.

0.085(0.3) + (0.015+0.56)(0.62) + (0.1+0.1)(1.5) = 0.68

0.68 is the new 'stressed' Averaged Risk Weighted factor. Now we can calculate a new 'risk weighted loan balance figure' from the existing 'exposed assets at default' figure.

The sum of the business related loan assets 'exposed at default' on the last balance date (30-09-2019) was $87,935m. So our new 'Risk Weighted Adjusted' figure is:

0.68 x $87,935m = $59,796m

This is an increase of: $59,796m - $51,560m = $8,236m

WBC requires a minimum of 8% of the incremental 'book value' of business loans on the books. So the amount of new capital WBC needs to cover off these business loans under my 'stressed business' scenario is:

0.08 x $8,236m = $659m.


0.08 x $8,236m = $659m

This figure is not the same as the amount of new capital needed. The amount of new capital required could be less as the total does not take into account any 'buffer capital' the bank may already have on the books in anticipation of a downturn in the business market. Selling off liquidated business assets is another way to reduce the amount of 'bank support capital' needed.

Of particular interest is how this 'potential increased capital requirement' squares off against the provision set aside under the newly adopted ECL (Expected Credit Loss) method of booking 'Expected' bad debts.

From

https://www.westpac.com.au/content/dam/public/wbc/documents/pdf/aw/ic/Westpac_Pillar_3_Report_December_2019.pdf

and on page 13, the 'Regulatory Loss for Non-defaulted Exposures' is on the books at $431million for 'business lending' and $351m for 'Small Business'. That is a combined total of $782million.

Comparing my projected loss of $659m to the ECL provisions of $782m already on the books:

$659m -$782m = 'a negative number'

That means the balance sheet is already set up handle such a loss. For current Westpac shareholders, I think that is encouraging.

SNOOPY

[Snoopy]

Stop it Snoops .. too much more of this & I'll start having nightmares..

To balance how do you factor in for new business add ins, restructured loans, deferred loan arrangements etc ?


Before I answer that question let's be very clear what I am talking about here. I am talking about the amount of capital on a bank's balance sheet that is needed to support a certain level and category of loan.

A balance sheet is taken at a snapshot in time. So whether a loan is 'new' or 'older' makes no difference. New or old, a total loan balance is a total loan balance on any particular date (in this case EOFY2019 which was 30th September 2019).

I am answering the rest of your questions assuming the loans you are talking about are categorised by the bank using the SCRA (Standardised Credit Risk Assessment Approach).

For me to answer the second bit of your comment, you would have to be more specific as to what a 'restructured loan' meant.

IF for example the borrower wanted to:

i/ split the loan that was maturing in four years INTO
ii/ three smaller loans of equal total value maturing in two years, four years and six years

THEN I don't think it would make any difference to the amount of capital the bank would need to support these loans (until the first loan was repaid anyway) PROVIDED the bank was in agreement with these changes.

However, if the restructuring amounted to some kind of deferred payment arrangement, this might indicate that the customer was forecasting having difficulty paying back that loan. If it was a loan to buy capital plant, then it could fall from being a 'Group B' loan to a 'Group C' loan. In that instance the amount of capital the bank needed to support that same loan would double, even as the underlying value of the loan did not change.



& there will likely be further who change banking shop for better deals elsewhere perhaps with/without added assistance


If a customer goes elsewhere, then their loan will move from one bank's book to another. Looking at the situation from this single loan perspective, then a customer leaving will result in the capital needed to support this loan no longer being required by the bank.

Next you speak of 'assistance'. What if the assistance is in the form a 'government guarantee' agreeing to repay the bank 80% of the loan if it goes bad? This makes no difference at all to the amount of bank capital needed to support the loan (as I see it). This is because a loan is graded on the likelihood of the loan being repaid in a 'customer operational sense'. So who might bail the lender out eventually, if the loan fails, makes no difference to how the underlying likely 'thin profit margin' customer business model works.

From page 9

https://www.bis.org/bcbs/publ/d347.pdf

"A Grade C loan would include higher credit risk exposures to counterparties that have material default risks and limited margins of safety."

Yet, I had a contrary closing thought. Maybe you could argue that with the government taking 80% of any loan loss on the chin, the 'material default risk' for the bank is less? On balance, I still think the 'default risk'(i.e. the act of defaulting) is different to the 'repayment risk' though. Happy to be corrected if I have that wrong!

SNOOPY

[nztx]

Before I answer that question let's be very clear what I am talking about here. I am talking about the amount of capital on a bank's balance sheet that is needed to support a certain level and category of loan.

A balance sheet is taken at a snapshot in time. So whether a loan is 'new' or 'older' makes no difference. New or old, a total loan balance is a total loan balance on any particular date (in this case EOFY2019 which was 30th September 2019)..


Very informative postings - Snoopy - thanks for posting for us..

[Snoopy]

some strong provisioning coming through today Snoops, a lot more than 200m , I'm reading 1,430m plus 140m in insurance.
Share price didn't react much though.


I finally got around to seeing the HY2020 pre-result provisioning as announced in the 14th April 2020 Press Release update.

Provisioning for HY2020



ItemValueNotes



Internal Incremental Crime Fighting provision$80m(Tax deductible)


Wrongly categorised business loan refunds$105m
(Tax deductible)


Missed collective court settlement + Refund of Wealth fees$130m(Tax deductible)


Incremental remediation program cost$90m(Tax deductible)


Litigation Matters$40m(Tax deductible)


Capitalised Software Value Adjustment$100m(Tax deductible)


Disentangling Westpac Life Insurance Services from BT Super$100m(Tax deductible)


Bushfire Insurance Claims (Operational but Unusual) $140m(Tax deductible)


Total Tax deductible Provisions$785m


After Tax Effect (Total Tax deductible Provisions x 0.7)$550m


AUSTRAC paedophile enabling punishment provision (Court to Determine)$900m(Not tax deductible, ref HY2020 Results p16)


Total After Tax Provisions$1,450m



However, the telling first line in this press release is that all this 'excludes impairment provisions'. That sounds ominous. According to my own impairment estimates to date, current ECL (Expected Credit Losses) already set aside may cover most of these. But I wonder if these provisions are exhausted, whether Westpac must immediately re-provision on a similar scale in expectation of future crises yet to materialise (in reality a continued slide down the existing COVID slide beyond this year's provision?) Anyone know?

Provisions relating to the AUSTRAC civil proceedings have been expensed as costs, Provisions in relation to the Expected Credit Loss model (see Part 2, my post 226) and by extension Covid-19 will be added to the 'impairment provisions' in the accounts.



Impairment Category
Impairment Expense
Reference HY2020 Result Announcement


AUSTRAC Matters (1)
($A1,027m)
(Section 1.3.2)


Penalty Provisions (2)
($A258m)
(Section 1.3.2)


Total
($A1,285m)




This total does not correspond to the $1450m that I have estimated above. The difference my be mostly explained by the inclusion of the bushfire claims in the first list.

Notes

(1) After tax (HY2020 Presentation p4). The $1,027m total consists of a $900m provision for a fine (an educated guess as actual fine could be more or less) and $127m of additional costs chalked up to the Westpac in house rehabilitation response plan.

(2) A $258m reduction in 'cash earnings' (after tax, refer HY2020 Presentation p13) from contributions to higher regulatory and compliance costs and additional provisions for estimated customer refunds, payments, associated costs and litigation (HY2020 Result Section 2.1). This $258m is made up from pre-tax payments totalling $329m (ref HY2020 Presentation p59) to Banking customers (who were provided with business loans that should have been covered by the National Consumer Credit Protection Act and the National Credit Code) of $104m and Wealth Management customers (where certain wealth management fees were inadequately disclosed) of $133m. Associated implementation costs for these two classes of payments were $92m.

SNOOPY

[Snoopy]

Westpac averaged Risk Weighted Assets EOFY2019 ($m)




Asset Categories
Risk Weighted Assets {A}
Exposure at Default {B}
Averaged Risk Weighted Factor {A}/{B}


Corporate
74,807 139,1730.54




From p13 https://www.westpac.com.au/content/d...ember_2019.pdf

Corporate loans carry an RWA value of:

$74,807m/$139,173m = 0.54.

Comparing that 'averaged' figure to the table (below) it looks like the 'typical' loan might be thought of as "A" grade.

From page 7 https://www.bis.org/bcbs/publ/d424_hlsummary.pdf



External rating of General Corporate CounterpartyRWA Factor


AAA to AA-20%


A+ to A-50%


BBB+ to BBB-75%


BB+ to BB-100%


Below BB-150%


Unrated100%



Yet even quite respected NZX listed businesses seem to have a significantly lower credit rating than that.

Contact Energy BBB
Sky City BBB-
Skellerup (?)
Spark A-
Turners Automotive Group (No rating)

I have trouble thinking how an 'averaged portfolio of corporate debt' can have an averaged Risk Weighted Asset factor just shy of grade 'A'.

SNOOPY

[Snoopy]

Next you speak of 'assistance'. What if the assistance is in the form a 'government guarantee' agreeing to repay the bank 80% of the loan if it goes bad? This makes no difference at all to the amount of bank capital needed to support the loan (as I see it). This is because a loan is graded on the likelihood of the loan being repaid in a 'customer operational sense'. So who might bail the lender out eventually, if the loan fails, makes no difference to how the underlying likely 'thin profit margin' customer business model works.


I wonder if what I had hypothesised above has been manifested in the link below?

https://www.rnz.co.nz/news/business/414829/bank-support-of-loans-scheme-for-smes-too-slow-Robertson

The radio equivalent of this story talked about business having to come up with a two years forward planning forecast as regards cashflows.

Q/ How do you model cashflows in a post Covid-19 environment?
A/ Think of a number!

https://www.newsroom.co.nz/2020/04/23/1140808/loan-scheme-not-so-open-for-business

---------

Financial adviser Graham Smith of Keyman Insurance said emphasis on 'normal lending criteria' was the real problem with the scheme.

Smith said banks had tightened up their lending criteria before the present crisis on the back of RBNZ restrictions to cool down the housing market.

He said even if criteria were loosened a notch now, it would still be quite tough for most to meet.

"The people who are managing to get additional funding, they're having to put assets on the line that they might not have had to in the past," Smith said.

Smith said before the pandemic, a restaurant owner might have been able to get a loan for his business without needing to use his house as security.

"Now the banks are saying we'll loan you the money, but now we want full security over your house as well," he said.

---------

Having your house as security reduces the amount of bank equity required to back up the loan. Even a home loan with only a 10% equity deposit (RWAF=0.5) means the bank must hold 33% less capital than it would have to under the alternative scenario of funding the business directly ( RWAF=0.75 (Grade B business subject to business cycle vagaries) )

The government's support for business loans, shouldering 80% of any capital lost -should it fail-, doesn't seem to help the equity required at the bank to back the loan up.

SNOOPY

[peat]

Barramundi increased their weightings in the Australian banks, ANZ, CBA, NAB and Westpac in the middle of March

[Grimy]

And I've recently added a few more ANZ and WBC too.

[Snoopy]

From p13 https://www.westpac.com.au/content/d...ember_2019.pdf

Corporate loans carry an RWA value of:

$74,807m/$139,173m = 0.54.

Comparing that 'averaged' figure to the table (below) it looks like the 'typical' loan might be thought of as "A" grade.

From page 7 https://www.bis.org/bcbs/publ/d424_hlsummary.pdf



External rating of General Corporate CounterpartyRWA Factor


AAA to AA-20%


A+ to A-50%


BBB+ to BBB-75%


BB+ to BB-100%


Below BB-150%


Unrated100%



Yet even quite respected NZX listed businesses seem to have a significantly lower credit rating than that.

Contact Energy BBB
Sky City BBB-
Skellerup (?)
Spark A-
Turners Automotive Group (No rating)

I have trouble thinking how an 'averaged portfolio of corporate debt' can have an averaged Risk Weighted Asset factor just shy of grade 'A'.


I have had some more thoughts on why the RWA factor for 'corporate' debt is so low.

The 'corporate' header is defined in the footnotes on p43 of the HY2020 result release as debt that:

"typically includes exposure where the borrower has annual turnover greater than $50 million, and other business exposures not captured under the definitions of either Business lending or Small Business."

There is no separate category for 'Commercial Property' in the 'Westpac Pillar 3 Report' from December 2019, which references the earlier end of the full year period of FY2019 (on date 30th September 2019). So I wonder if 'Corporate Owned Commercial Property' is included in 'Corporate Loans'?



Commercial Real Estate (CRE) Exposure 'Loan to value' ratioRWA Factor


<60%min(60% or RW of Counterparty)


>60%RW of Counterparty



Note that the above reference to commercial real estate refers to real estate owned for the owners use. Real Estate owned to rent out has a different RWA scale, which requires the bank to hold more capital against such commercial loans. Provided the loan value ratio is under 60%, then the RWA factor can be 60%. Depending on the size of the commercial property portfolio owned by corporates, such loans could help reduce the RWA factor of a 'corporate loan portfolio'.

Total commercial property exposure as at 30th September 2019 was quoted as $66.9billion (p86 of FY2019 Presentation and Investor Discussion Pack).

SNOOPY

[Snoopy]

I finally got around to seeing the HY2020 pre-result provisioning as announced in the 14th April 2020 Press Release update.

Provisioning for HY2020



ItemValueNotes



Internal Incremental Crime Fighting provision$80m(Tax deductible)


Wrongly categorised business loan refunds$105m
(Tax deductible)


Missed collective court settlement + Refund of Wealth fees$130m(Tax deductible)


Incremental remediation program cost$90m(Tax deductible)


Litigation Matters$40m(Tax deductible)


Capitalised Software Value Adjustment$100m(Tax deductible)


Disentangling Westpac Life Insurance Services from BT Super$100m(Tax deductible)


Bushfire Insurance Claims (Operational but Unusual) $140m(Tax deductible)


Total Tax deductible Provisions$785m


After Tax Effect (Total Tax deductible Provisions x 0.7)$550m


AUSTRAC paedophile enabling punishment provision (Court to Determine)$900m(Not tax deductible, ref HY2020 Results p16)


Total After Tax Provisions$1,450m



However, the telling first line in this press release is that all this 'excludes impairment provisions'. That sounds ominous. According to my own impairment estimates to date, current ECL (Expected Credit Losses) already set aside may cover most of these. But I wonder if these provisions are exhausted, whether Westpac must immediately re-provision on a similar scale in expectation of future crises yet to materialise (in reality a continued slide down the existing COVID slide beyond this year's provision?) Anyone know?

Provisions relating to the AUSTRAC civil proceedings have been expensed as costs, Provisions in relation to the Expected Credit Loss model and by extension Covid-19 are added to the 'impairment provisions' in the accounts.


Westpac have now released the impact of their Covid-19 doubtful debt provisions for the half year. These are separate from the previously announced unrelated provisions in 'Provisioning for HY2020 (Part 1)'.

However this is not likely to be the end of Covid-19 adjustments. From p1 of the HY2020 result release:

"Given that COVID-19’s economic impact only escalated in March 2020, these metrics do not fully reflect the more challenging position beginning to emerge across the economy and its impact on customers."

The Covid-19 provisions -so far- , combined with the previously declared provisions in Part 1 (my post 220), are as follows:



DivisionImpairment Expense
Total Net Loans + Provisions {L}
%ge of Total Net Loans
Impairment Expense + G.B. Reallocated {P}
{P}/{L}
Reference HY2020 Result Announcement


Consumer
($A448m)
$A390,400m
54%
($A702m)
0.18%
(Section 3.1 p53)


Business
($A805m)
$A168,300m
23%
($A913m)
0.54%
(Section 3.2 p57)


Westpac Institutional Bank
($A315m)
$A80,800m
11%
($A367m)
0.45%
(Section 3.3 p60)


Westpac New Zealand
($A200m)
$A87,500m
12%
($A256m)
0.29%
(Section 3.4 p62)


Group Businesses
($A470m)




(Section 2.0 p9)


Total($A2,238m)
$A727,000m
100%
($A2,238m)



It is important to realise that these incremental annual impairment adjustments are in addition to any impairment provisions already on the books. The total loan provisions on the books at the end of the FY2020 half year period add to $5,766m (HY2020 Result, Note 10 p113). $5.766m represents the end result of a process, a three scenario weighted probability rated assessment of modelled outcomes:



1/bad40%


2/expected55%


3/ gentle 5%



recessionary impacts. This equates to a total portfolio impairment provision rate of:

$5,766m / $727,000m = 0.80%

Looked at another way, within the $2,238m total half yearly charge, there is a $1,581m Covid-19 inspired Capital Asset Provision (CAP) adjustment (HY2020 Result, Section 2.2.9), which can be split into two parts.

1/ Firstly, a $1,135 million increase in CAP is due to a more pessimistic 'weighted scenario analysis' coupled with changes in the macroeconomic forward-looking outlook. This $1,135m is calculated under the ECL (Expected Credit Loss) model (from HY2020 Result Note 10 p115). This current loss provision is centralised on a base case economic forecast. The central aspect to this forecast is for a relatively short and sharp economic impact followed by a subsequent recovery.

2/ A second tranche of CAP adjustment of $446 million is best described as an increased COVID-19 overlay provision. This is primarily targeted in the future on industries and consumers where an increase in delinquencies, downgrades and defaults (HY2020 Result, Note 10 p116) are to be expected as a result of the economic shut down. Such an overlay will eventually be incorporated within the ECL modelling. But right now the ECL modelling covers only the general deteriorating economic conditions does not include any one off 'shock' effect that individual customers may suffer. Hence the extra $446m provision.



$1,135m


+ $446m


= $1,581m



There is a third category of 'Other net ECL movement adjustments', unrelated to Covid-19. This $560m (HY2020 Result, Note 10 p115) adjustment includes loans migrating from stage 2 (performing) to stage 3 (non-performing). The actual number of 'Non Performing level 3 loans' on the provisioning books (HY2020 Result, Note 10 p113) increased from $1,355m at the last full year balance date of 30-09-2019 to $1,707m at 31-03-2020. This was a net rise of $352m. The actual transfers to stage 3 were $336m (HY2020 Result, Note 10 p114).



$1,135m


+ $446m


+ $560m


= $2,141m



There is (see Section 2.2.9 p32) a separate net $181m Capital Asset Provision (CAP) on 'Individual Assessed Loan Provisions', and a separate summed $2,057m CAP against 'Collectively Impaired Assets'.



$181m


+ $2,057m


= $2,238m



These CAPs (Reference Section 2.2.9 p32, 'First Half 2020 – Second Half 2019' comparison) include $61m in relation to the Australian Bushfires and ongoing drought.

The remeasurements on the ECL model over the half year (HY2020 Result, Note 10 p114) were made up as follows:



Balance at 30-09-2019$3,913m


add Business Activity During Period $184m


add Net Revision of Provisions within ECL $2,141m


less Write Offs ($579m)


add Exchange Rates and Other Adjustments $65m


Balance at 31-03-2020$5,766m



This is an increase of $1,853m over the half year.

Note that the new business provisions added during the year and the write offs taken out of the system during the year are distinct from the ECL adjustments made during the year.

SNOOPY

[Snoopy]

(6) At EOFY2019 the Pendal share price was $7.39. This represents a capital dollar value of:

$7.39 x 30.814493m = $227.719m

So the capital loss for the year was: $227.719m - $270.859m = -$43.140m

Westpac's share of Pendal's 'Total Comprehensive Income' for the year was $14.993m (refer my post 179 on this thread). Subtract from that the corresponding period dividend money paid out to WBC during the year of $15.576m (refer my post 164 on this thread). This gives the incremental 'retained earnings value' ( $14.993m - $15.576m = -$0.583m ) that must be subtracted from the book value of the asset.

Change in book value of Pendal shares = $227.719m - $270.859m - $0.583m = -$43.723m

OR $270.859m - $43.723m = $227.136m.

The 'Available for Sale' equity securities balance of $134m (AR2019, p176). What can explain this discrepancy?

The accounting standard for reporting these matters changed over the year, with reporting now under AASB9. I don't understand how the equity securities balance in the 'parent entity' is calculated. But given it was $67m at EOFY2018 (AR2018 p172) and $66m at EOFY2019 (AR2019 p176), this indicates that in the grand picture of things very little has changed. My guess is that at the 'Consolidated' level, this 'missing' equity securities balance has been moved somewhere else within the consolidated accounts. But at the time of writing this, I don't know where!


It has taken a few months, but today I just may have tracked down the answer to this 'March mystery' (my post 169 on this thread). What seems to have happened is that some 'Available for Sale' (old definition) assets have been reclassified separately as 'Trading Assets'. From AR2019 p149 'Reconciliation of the 'Opening Balance Sheet' (which is actually the 'Closing Balance Sheet' for FY2018).



FY2018 Balance SheetReclassification
Re-measurement
FY2018 Balance Sheet Restated


Trading Securities and Financial Assets measured at FVIS(*)
$23,132m
$275m

$23,407m


Available for Sale Securities
$61,119m
($61,119m)

$0m


Investment Securities
$0m
$60,844m
($9m)
$60,835m


Total
$84.251m
$0m

$84,242m




{*) FVIS means 'Fair Value through Income Statement'

'Equity Securities', in particular a subset of that -'Pendal Group'- , make up only a tiny fraction of 'Investment Securities' on the books. But you can't fit $227.1m worth of equity securities assets into a balance sheet allowance of just $134m. It wouldn't make sense to move just half of those Pendal assets over to be 'Trading Securities'. So I have to conclude that the whole lot have been moved.

Now I move over to Note 10 (AR2019 p174). I can see that 'Other financial Assets measured at FVIS' are listed in a separate category from 'Trading Securities' within the broad classification. That distinction wasn't made clear on the balance sheet. It does appear there is some stuff in the 'Trading Securities bucket' that is not there to be traded. My guess is that the Pendal Group shares are in the 'Other financial Assets measured at FVIS' sub-bucket. There are certainly $344m of equity securities in there. $344m is enough to cover my outstanding balance of Pendal shares totalling $227.1m. So it looks like -finally- I have found where those Pendal shares got moved to. It was a nasty trick though - hiding shares in a one time subsidiary - now the independently listed Pendal- in what is in effect a share trading account. That Trading Securities bucket was something I never thought to look into the first time around back in March.

SNOOPY

[Snoopy]

Pendal (was BTIM) Shares Held by Westpac


Summary: Multi year effect of Pendal on Westpac (by Snoopy)

Pendal Dividend to Westpac (recognised in Westpac income statement)
Capital Revaluation Gain (Loss): Pendal over FY
Pendal as Associate Book Value EOFY
Book Value: Pendal as Available For Sale EOFY
Market Value: Pendal as Available For Sale EOFY


FY2014$42.568m (1)
$0m
N/AN/AN/A


FY2015$60.771m
$1,036m
$756m (2)
N/AN/A


FY2016$34.060m
$0m
$718m (3)
N/AN/A


FY2017$37.225m
$262.5m
N/A
$340.5m (4)$341m


FY2018$12.523m
($69.6m)
N/A
$280.1m (5)$271m


FY2019$15.576m
($43.1m)
N/A
$227.1m (6)$228m



Notes

(1), (2), (3), (4) (5) and (6): See Post 169 on this thread



I have been browsing the Westpac 'back catalogue' on this thread and found what must be the worst post I have ever read on Sharetrader. It was long, rambling, mixed up and incoherent in purpose and direction. Then came the ultimate moment of complete embarrassment when I realised that I had written it! Since my 'discovery' I have spent considerable time making a few corrections to my post 169, adding some salient information and generally reading and re-reading it until it made sense, for those who have the fortitude to tackle it (which I realise won't be many). The post still won't win any awards. But the summary of what I wrote is in the table I have requoted above, Then blow me down, when I had finally got to the stage of being able to extricate Pendal from the Westpac accounts, I see that in constructing Westpac's non IFRS 'Cash' accounts and Financial Statements someone from within Westpac has already done the exercise! As Charlie Brown would say "Arrrrrgh!". However all my effort has not been wasted.

The real point of this exercise was to figure out how 'Subsidiaries', 'Associates' and 'Available for Sale' Investments are treated under Australian accounting rules. I feel that I have a much better grasp of this now. And I have the extra benefit of being able to compare what I did with what Westpac came up with. Here is how Westpac extricated Pendal from their own results. I have referenced and added Westpac's own comments made in the 'Segment Reporting' section of the respective annual reports for some explanation.





Cash Earnings Adjustments Relating to Pendal
Reference


FY2015 (1)
$665m
AR2017 p136


FY2016 (2)course night
$0m
AR2017 p136


FY2017 (3)
$171m
AR2019 p158


FY2018 (4)
($73m)
AR2019 p158


FY2019 (5)
($45m)
AR2019 p158



(1) AR2015 p68: "Partial sale of BTIM (Pendal) - During 2015 the Group recognised a significant gain following the partial sale and de-consolidation of the group's shareholding in BTIM. This gain has been treated as a cash earnings adjustment given its size and the fact that it does not reflect on-going operations."

"The commencement of equity accounting for BTIM resulted in recognition of notional identifiable intangible assets within the investments in associates carrying value. The amortisation of these intangible assets (excluding capitalised software) is a cash earnings adjustment because it is a non-cashflow item and does not affect cash distributions available to shareholders."

(2) AR2016 p89: "BT Investment Management Limited (BTIM/Pendal) is 29.5% owned by BT Financial Group (Australia) (BTFG) following a partial sale in FY2015, with the business being equity accounted from July 2015. BTFG works in an integrated way with all the Group's (other) Australian divisions in supporting the insurance and wealth needs of customers."

(3) AR2017 p87: "During FY2017 the group recognised a gain, net of costs, following the further sell down of the group's shareholding in BTIM (Pendal). Consistent with previous treatment, this gain has been treated as a cash earnings adjustment given its size and that it does not reflect ongoing operations."

(4) AR2018 p97: "In 2018 the group recorded an impairment on its current holding of Pendal shares. Consistent with prior years these items have been treated as a cash earnings adjustment given their size and that it does not reflect ongoing operations."

(5) AR2019 p94: "Adjustment related to Pendal (previously BTIM): Consistent with prior years treatment, this item has been treated as a cash earnings adjustment given its size and that it does not reflect ongoing operations. From September 2018 this adjustment relates to the mark to market of the shares and separation costs related to the original sell down."

You will notice a phrase 'cash earnings adjustment' on high repeat in the above notes. The thinking behind this is to remove one off effects, both positive and negative, that are not related to daily running the operations of the WBC business on an on-going basis. I would argue the phrase 'cash earnings adjustment' is poorly chosen. If WBC sells down a significant chunk of Pendal Group, for example, then what they get is cash. Yet this cash is removed from what is termed the cash profit! If WBC had instead used the term 'Ongoing Business Profit' instead of 'Cash Profit', then the whole 'profit correction' thing would be clearer for shareholders.

-------


So how did I do?

The FY2015 and FY2017 capital gains look quite different. But my estimates are before tax. Australian companies have to pay a 30% tax on capital gains.

$1,036m x 0.7 = $725m

$262.5m x 0.7 = $184m

Once tax is taken off, I am only 7 to 9 percent high. I haven't taken into account any sell down costs associated with these transactions. So I am reasonably happy with my calculated estimates. Both of us agree on FY2016 with no capital adjustment booked.

The figures for FY2018 and FY2019 look close. But if I take tax off my figures:

FY2018: ($69.6m) x 0.7 = ($48.7m)

FY2019: ($43.1m) x 0.7 = ($30.6m)

then they don't look so good. The difference with these two figures, compared to the other two from FY2017 and FY2015, is that no transaction has taken place. They are just 'mark to market' adjustments. So perhaps no tax adjustment is made in the accounts until an actual transaction occurs? That makes sense from my perspective.

One thing that is a surprise is that there appears to be no allowance made by Westpac for the dividends that were paid to them from their Pendal holdings. I would have thought that if you wanted to wipe Pendal from the performance picture, then you would take out the dividends as well? Then again, when I look at the Westpac accounts
it is not clear to me where those dividends are detailed (I got my dividend to Westpac information from the Pendal accounts). The best I have been able to say is that they look to be packaged up with other dividends from other sources. So maybe it is too difficult to disentangle these dividends from the Westpac accounts as presented? That is the best explanation I can come up with as to why Westpac has apparently not taken out the dividends paid to it by Pendal.

SNOOPY

[Snoopy]

I am attempting to unpick the 'Wealth Management' side of WBC from what is left.

"BT Financial Group Australia" , a part of Westpac, is an unrelated business to "BT Investment Management Limited", the listed entity.

I need to 'unpick the wealth business' because:

1/ Westpac have reduced their links to the separately listed wealth management arm "BT Investment Management Limited" (BTIM, now renamed 'Pendal Group') to around 10%, with the expectation that this residual holding will be sold.

2/ Westpac have also disestablished their internal wealth management division "BT Financial Group Australia".

This means historical comparisons are going to be difficult from here on in. Westpac have redone their comparatives for FY2018 and FY2017 to account for this latter change at least. But I want to do the full exercise for FY2016 and FY2015 as well.

So let's get on with this unpicking exercise...
-------

On the FY2018 WBC balance date of 30th September 2018, the Westpac internally owned and managed fund business arm was still called "BT Financial Group Australia"!

By EOFY2019, what was the Westpac division "BT Financial Group Australia" has been split up and the business sub units reallocated within other Westpac divisions. The effect of this can be demonstrated by looking at two different reporting perspectives the reallocation of FY2018 earnings between Westpac divisions in accordance with the table below:



Westpac Business Unit Cash EarningsFY2018 (from AR2019 p157)FY2018 (from AR2018 p155)Difference


Consumer Bank$3,423m$3,140m+$283m (+9.0%)


Business Bank$2,756m$2,159m+$597m (+28%)


BT Financial Group$0m$645m-$645m (-100%)


Westpac Institutional Bank$1,093m$1,086m+$7m (+0.65%)


Group Business($141m)$101m-$242m (NM)


Total Australian Cash Earnings$8,065m$8,065m$0m



As you can see from AR2019 retrospective reallocation, what was the remaining BT business unit, the 'BT Financial Group' has been 'written out of history' a year down the track.

As was reported in the news at the time:

https://www.smh.com.au/business/banking-and-finance/westpac-quits-financial-advice-in-deal-with-viridian-20190319-p515cr.html

"Westpac will continue to provide life insurance and a wealth management platform, Panorama, under the BT banner and will refer clients seeking financial advice to a panel of firms, as it would with people needing accounting or legal advice."

So Westpac still owns the "BT brand" and will still use the BT label on certain products.

"Chief executive Brian Hartzer on Tuesday said selling investment advice had become unprofitable, citing rising costs and the impact of the Future of Financial Advice (FOFA) laws, which banned advisers from receiving commissions on investment products."

This is an extraordinary thing to say when just one year earlier Westpac's internal wealth management division made cash profits of $645m (see above table). However, Hartzer must have only talking about giving 'personal advice'. Only the small bit of the internal wealth business ('personal advice') that hasn't been reallocated (see above table) has been on sold to "Viridian Advisory". So who are 'Viridian Advisory'?

-------

"Viridian Advisory will take over part of the bank's advice arm while the rest of Westpac's BT Financial Group businesses - private wealth, superannuation, life insurance and investments - will be rolled into its consumer and business banking divisions."



We have unpicked the earnings (above). We now need to unpick what happened to the Revenues ('Net Operating Income before Operating Expenses and Impairment Charges')



Westpac Business Unit RevenuesFY2018 (from AR2019 p157)FY2018 (from AR2018 p155)Difference


Consumer Bank$9,161m$8,494m+$667m (7,9%)


Business Bank$6,924m$5,254m+$1,670m (+32%)


BT Financial Group$0m$2,226m-$2,226m (-100%)


Westpac Institutional Bank$3,007m$2,972m+$35m (+1.2%)


Group Business$901m$847m+$54m (+6,7%)


Total Australian Revenues$19,993m$19,793m$200m



The difference figure should balance out to zero. It doesn't (quite). This is not an arithmetical mistake in my part.

SNOOPY

[Snoopy]

We have unpicked the earnings. We now need to unpick what happened to the Revenues ('Net Operating Income before Operating Expenses and Impairment Charges')


Time to repeat this exercise for FY2017



Westpac Business Unit RevenuesFY2017 (from AR2019 p157)FY2017 (from AR2018 p155)Difference


Consumer Bank$9,084m$8,451m+$633m (+7,5%)


Business Bank$6,567m$5,026m+$1,541m (+31%)


BT Financial Group$0m$2,255m-$2,255m (-100%)


Westpac Institutional Bank$3,070m$3,035m+$35m (+1.2%)


Group Business$893m$680m+$213m (+31%)


Total Australian Revenues$19,614m$19,447m$167m





Westpac Business Unit Cash EarningsFY2017 (from AR2019 p157)FY2017 (from AR2018 p155)Difference


Consumer Bank$3,452m$3,155m+$297m (+9.4%)


Business Bank$2,554m$2,003m+$551m (+27.5%)


BT Financial Group$0m$736m-$736m (-100%)


Westpac Institutional Bank$1,163m$1,159m+$4m (+0.35%)


Group Business-$24m$92m-$116m (NM)


Total Australian Cash Earnings$7,145m$7,145m$0m



SNOOPY

[Snoopy]

Time to repeat this exercise for FY2017.




Time to repeat this exercise for FY2019.



Westpac Business Unit RevenuesFY2019 (from AR2019 p156)


Consumer Bank$9,083m


Business Bank$6,556m


BT Financial Group$0m


Westpac Institutional Bank$2,735m


Group Business-$2m


Total Australian Revenues$18,372m





Westpac Business Unit Cash EarningsFY2019 (from AR2019 p156)


Consumer Bank$3,288m


Business Bank$2,431m


BT Financial Group$0m


Westpac Institutional Bank$1,014m


Group Business-$869m


Total Australian Cash Earnings$5.864m



Rather unusually for the 'Group Business', this business unit has suffered a very significant loss adding up to hundreds of millions of dollars. This has 'distorted' Group Business profitability for reasons described in AR2019 p155

"Following the Group's decision to restructure the Wealth operating segment and to exit the advice business in March 2019, the remaining Advice business (including associated remediation) and support functions have been transferred to Group Business"

Westpac is facing several lawsuits in Australia, and compensation claims against in house wealth management advisors. Some compensation has been put on the books in anticipation of settlements, The actual dollars set aside can be found in an earlier post of mine on this thread (Post 139 titled: An unorchestrated 'litigation lot' of liabilities: Part 2).

Real and necessary as the total $1,130m after tax provision is, these matters are not designed as a 'go forward' part of Westpac's new business development strategy. It will therefore be necessary to remove this 'litigation compensation' and 'refund of fees' effect from any normalised earnings that we wish to derive for the FY2019 period.

SNOOPY

[Cyclical]

Wow, Snoopy, I really admire your dedication in picking all of this apart and making some sense of it. Are you currently a holder, or just going through due diligence? Both WBC and ANZ seem to be drifting slowly lower of late, which is kind of what I'd expect over the coming weeks/months in this climate, but then that's what I thought was happening prior to the big bounce a couple of months ago (when I sold out too early)...

[Snoopy]

Wow, Snoopy, I really admire your dedication in picking all of this apart


Thanks :-)



and making some sense of it.


Eeeerrrm. Not sure I have made any real progress with this bit :-(



Are you currently a holder, or just going through due diligence?


Have been on the share register since 2005. Before then I had WBT which was a 'unique to NZ' property holding vehicle that gave NZ shareholders fully imputed WBC dividends while having 1:1 equivalence rights with WBC shares. Things were going well: Economy going well. Share price went up. Economy slowing down. Share price kept going up. And of course all along the way I was getting nice fat ever growing dividends. This is why I regarded WBC as a 'set and forget' investment. However, looking back, the tide seemed to turn around 2017. Dividends had stopped growing and the share price started to shrink. And now the share price is lower than when I officially joined the WBC share register in 2005! Clearly WBC is no longer a 'set and forget' investment.

Back in 2017 WBC was one of my larger investments in capital terms. Without buying and selling any shares, now it is one of my smaller ones :-(. My 'due diligence' today is very much motivated by having 'skin in the game'. My aim is to filter out the 'one off' effects' from the core business and look at the earning capability of that 'sound core' going forwards. WBC has a history of navigating 200 years of business cycles after all. So far I have failed to identify where 'fair value' is. So I have put the 'banking capital' that I had tentatively set aside to put into WBC into Heartland Group Holdings instead.



Both WBC and ANZ seem to be drifting slowly lower of late, which is kind of what I'd expect over the coming weeks/months in this climate, but then that's what I thought was happening prior to the big bounce a couple of months ago (when I sold out too early)...


Yes, it is very difficult to time this one on any kind of fundamental analysis. But with the real capital of Australia, Melbourne, in another lock-down (don't tell the pollies in Canberra I said that) you may yet not regret selling out!

SNOOPY

[Snoopy]

We have unpicked the earnings. We now need to unpick what happened to the Revenues ('Net Operating Income before Operating Expenses and Impairment Charges')



Westpac Business Unit RevenuesFY2018 (from AR2019 p157)FY2018 (from AR2018 p155)Difference


Consumer Bank$9,161m$8,494m+$667m (7,9%)


Business Bank$6,924m$5,254m+$1,670m (+32%)


BT Financial Group$0m$2,226m-$2,226m (-100%)


Westpac Institutional Bank$3,007m$2,972m+$35m (+1.2%)


Group Business$901m$847m+$54m (+6,7%)


Total Australian Revenues$19,993m$19,793m$200m





I have done the numbers for the two years that WBC has retrospectively documented after the dismantling of their BTFG business unit. Now it is time to re-present these numbers in a different way, this time just concentrating on the percentage changes for the two years fully documented. These figures will be useful in estimating what would have happened if the BTFG division had been taken out even earlier, over FY2015 and FY2016. After that I will present a 'verbal narrative', explaining what the 'percentage changes' mean in terms of 'boots under the office desk '.

For those who are intrigued by such a sad story of decline, and want to feel even sadder, a very comprehensive slide show of the weakening of BTFG can be found here:

https://www.westpac.com.au/content/dam/public/wbc/documents/pdf/aw/ic/WBC_Resets_Wealth_190319.pdf

If you can spare an hour, it is probably best looked at in conjunction with the contemporary press conference.

https://edge.media-server.com/m6/p/gu6k6yi4





Changes in Westpac Cash Earnings distribution following the death of BTFG business unit



Westpac Business Unit Cash EarningsDifference over FY2017 and FY2018 years


Consumer Bank+9.0 to 9.4%https://edge.media-server.com/m6/p/gu6k6yi4


Business Bank+27.5% to 28%


BT Financial Group-100%


Westpac Institutional Bank+0.35 to 0.65%


Group BusinessNot Meaningful





Changes in Westpac Revenue distribution following the death of BTFG business unit



Westpac Business Unit RevenuesDifference over FY2017 and FY2018 years


Consumer Bank+7.5 to 7.9%


Business Bank+31 to 32%


BT Financial Group-100%


Westpac Institutional Bank+1.2 to 1.2%


Group BusinessNot Meaningful




Narrative of What Happened

What has brought about these divisional structural changes within Westpac?

Westpac have, over the last few years, been quietly thinking through what aspects of retirement planning they hold a competitive advantage in. The aim is to keep that part of the business in which they do have an advantage and 'sell on' that in which they don't.

There has been a long term investment trend away from 'retail funds' to 'industry funds' as places to put your retirement savings. 'Retail funds' have, in the past, been the class of investment recommended by investment advisors. These funds pay advisors commissions. And the company that owns the fund aims to keep some profit. Contrast this with 'industry funds'. These are open to workers in a certain industry. They have a lower operating cost structure and are 'not for profit'. That means any profit made is invested back into the fund. It would come as no surprise, given the respective cost structures, that industry funds tend to perform better than retail funds from an investor perspective. Pendal Group (formerly BTIM) runs Retail funds. Westpac decided they didn't have an advantage 'stock picking' for their own customers or running funds directly. So Pendal that started within BTFG, was the initial part of the wealth business to be first 'sold down' and most recently 'sold off completely' (24-06-2020). Yet this is only the first chapter in the story of dismantling the 'BT Financial Group' division.

From what was within BTFG, the Private Wealth, Platforms & Investments, and Superannuation businesses have been moved into an expanded 'Business Division'. If a customer is rich enough to have their 'Private Wealth' looked after, that invariably means they:

1/ are a highly paid professional, or
2/ own their own significant business (so are already under the 'Business Division' umbrella), or
3/ work as an executive for one of the corporations that the Westpac 'Business Division' is adept at servicing.

All three types of customer are a natural fit for the Businesss Division. Private Wealth was the largest contributor towards the old BTFG unit profit. The 'Panorama' platform, since it came on line in 2014, is the new way Westpac customers connect with independent financial advisors. The Panorama platform can also be used by sophisticated self directed Westpac customers managing their own investments. The cost to an advisor to get onto the Panorama platform has been cut from July 2018: Now a 0.15% p.a. asset based administration fee across their platform assets, capped once their assets reach $1 million, and a flat account fee of $540 p.a. . There is no longer any differentiation between different kinds of advisors. But as servicing costs for Panorama are only 50% of outgoing legacy systems, profitability for Westpac is retained, With Westpac ditching their in house advisors, Panorama can now be seen as a 'truly independent' administrative system. It depends entirely for its operation and growth on external advisors outside of Westpac. Westpac sees this as a strength. It is important for Panorama to be seen as independent, because competitor platforms 'HUB24' and 'Netwealth' are independently listed ASX companies in their own right. Both 'Retail funds' and 'Industry Funds' are potential customers for Panorama.

'BT Open Services' is a new (opened October 2018) dedicated adviser hub, offering advisers and licensees a range of services to support their advice practices. These services include customisable client marketing, technical support, governance support as well as insights and a schedule of educational and networking events. Both Panorama and BT Open Services are ultimately most utilised by a richer demographic that is more closely aligned to the Business division. Similarly superannuation – including corporate superannuation, and support for Self Managed Super Funds – is strongly linked to the Westpac Business division. Putting all the last three paragraphs together, If you look at the above table, then this tells the story of the vast majority of BTFG operations moving to the 'Business Division'.

Meanwhile the BTFG 'Insurance business' has moved into the Consumer division, to better meet the needs of Westpac's retail customers. Westpac's insurance has been well rated, either number one or two, in independent consumer surveys.

https://mozo.com.au/rate-and-review/westpac/home-insurance-reviews

The insurance business is a 'keeper' for Westpac and accounts for the smaller ramp up in business observed in the 'Consumer Division', following the disbanding of BTFG..

Now to return to those parts of the BTFG business that Westpac are getting rid of.

The 'Advice business', the provision of personal financial advice by financial advisers under Westpac's licence, has been transitioned to smaller independent operators, completely detached from any Westpac umbrella presence. This change has largely been driven by the new 'fee for service' culture that is now permeating amongst financial advice professionals and the associated end to continual annual 'clipping the ticket' on historical investment portfolio placements, otherwise known as 'trailing commissions'. Westpac expects around half of the retail level investors, some 9 to 10 thousand people, that they used to advise 'in house', will move across to a business called Viridian. Viridian is an independently owned investment advisory service, selected by Westpac for their service ethic. Any such transfer won't be automatic. Customers will need to 'opt in'. Other former Westpac superannuation customers may be happy with digital tools, like generic advice from robotic software.

Why did Westpac decide they could no longer impart investment advice through their own branch network? More comprehensive record keeping is now required, and skill levels required of advisors are now higher. What was once thought of as a 'one size fits most' exercise of box ticking, must now be thought of as a highly individualized service. The general decline in qualified advisors -under pressure from higher qualification requirements and lower trailing income streams- meant finding suitably qualified staff to work in all bank locations was not 'a given'. Find your niche of individual customers though, and a small nimble advisory firm can do a comprehensive job that cannot be matched by an old fashioned bank branch.

Under Westpac ownership the 'Advice business' had cash earnings of $7m over FY2016. But this switched to a cash earnings loss of $10m in FY2017 which ballooned out to a much larger loss of $53m over FY2018. While not disclosed, banking industry analysts have speculated on an operating cash loss of up to $100m over FY2019, while revenues are wound down faster than the cost structure that supports them. Westpac has budgeted $200m for restructuring costs in 1HY2019 with a further $50-100m of costs to be split between 2HY2019 and FY2020. This $250m to $300m is separate from any remediation payments to past customers. The remediation to compensate for historical bad advice from Westpac's recently disbanded team of in house financial planners has been done. The remediation for advice from Westpac aligned planners, who run their own businesses under Westpac guidelines, will take a little longer to disentangle. Any gain by Westpac from the passing on of customers to Viridian will offset the, so far incurred, $200m worth of restructuring pain. Of this $200m wind down estimate, 40% is in relation to one off transactions and redundancies, 40% is spent unplugging from the existing business arrangements and 20% is spent plugging into new business operating paths that replace the old. With the final unwinding of the BTFG division, Westpac expects a permanent $20m reduction in the high level corporate cost base.

SNOOPY

[Snoopy]

Under Westpac ownership the 'Advice business' had cash earnings of $7m over FY2016. But this switched to a cash earnings loss of $10m in FY2017 which ballooned out to a much larger loss of $53m over FY2018. While not disclosed, banking industry analysts have speculated on an operating cash loss of up to $100m over FY2019, while revenues are wound down faster than the cost structure that supports them.

Westpac has budgeted $200m for restructuring costs in 1HY2019 with a further $50-100m of costs to be split between 2HY2019 and FY2020. The remediation to compensate for historical bad advice from Westpac's recently disbanded team of in house financial planners has been done. The remediation for advice from Westpac aligned planners, who run their own businesses under Westpac guidelines, will take a little longer to disentangle. Any gain by Westpac from the passing on of customers to Viridian will offset the $200m worth of restructuring pain. Of this $200m wind down estimate, 40% is in relation to one off transactions and redundancies, 40% is spent unplugging from the existing business arrangements and 20% is spent plugging into new business operating paths that replace the old. With the final unwinding of the BTFG division, Westpac expects a permanent $20m reduction in the high level corporate cost base.


The 'Funds Management Business' (that's everything excluding insurance) within the old Westpac BTFG business unit had four underlying earnings drivers:

a/ Private Wealth, for high net worth customers, mainly under the 'Advance Asset Management' sub unit..
b/ Funds Under Management and Funds Under Administration Volume.
c/ Funds Under Management and Funds Under Administration Margin
d/ Investment Advice to Ordinary People

My 'quest of disentanglement' is honing in on the 'Investment Advice to Ordinary People' business that has so sharply deteriorated in recent years. Westpac are now out of this, with many existing clients transferring to independent advisor Viridian.


]
EOFY2015EOFY2016EOFY2017EOFY2018EOFY2019


No. of Aligned & Salaried Financial Advice Planners at Westpac1192113410118030



But how much contribution has 'Investment Advice to Ordinary People' made within the BTFG business unit (now itself disbanded and reallocated) in the past? I want to be in a position to remove any contribution (positive or negative) from 'Investment Advice to Ordinary People' in prior Westpac reporting periods. In previous years, 'Investment Advice to Ordinary People' has been reported to shareholders inside the 'BT Financial Group (Australia)' (BTFG) business unit inside the 'Funds Management Business' sub-classification. Information that I have gleaned from the respective annual reports and annual report presentations is tabulated below. Also included is information from the 19th March 2019 'Resetting Westpac's Wealth Strategy' stock exchange release. I refer in particular to Slide 11.

In the table below, the second column is included within the total that is the first column.



Funds Management Business (Cash Earnings after tax)
Advice to Ordinary People (Cash Earnings after tax)Reference


FY2015$560m$10.5mAR2017 p91, Note 1/ below


FY2016$498m$7mAR2018 p101, Resetting Westpac's Wealth Strategy March 2019, Slide 11


FY2017$413m($10m)AR2018 p101, Resetting Westpac's Wealth Strategy March 2019, Slide 11


FY2018$327m($53m)AR2018 p101, Resetting Westpac's Wealth Strategy March 2019, Slide 11


FY2019Reallocated to other Divisions($90m)Note 2/ below



Notes

1/ The 'Advice to Ordinary People' profit for FY2015 is not specifically disclosed. However we do learn from the FY2016 "Full Year Financial Results Presentation" slide 99 that: "Advice Income is lower from Reduced Activity." On the same page we learn that Average funds under Management over FY2016 was: ($17.8b + $18.3b)/2 = $18b verses ($19.8b +$18.3b)/2 = $19b over FY2015. That is a drop of $1billion. I am guessing incremental retail advice fees on such a portfolio would amount to 0.5% of the value of that portfolio.

0.005 x $1billion = $5m, or $5m x 0.7 = $3.5m after tax

So if this is the amount lost over FY2016 from the previous year, that means a good estimate of the 'Advice Fees' for FY2015 is : $7m + $3.5m = $10.5m


2/ The FY2019 figure that I have estimated is based on the following information from Slide 11 of 'Resetting Westpac's Wealth Strategy', and the information on 'Financials: changes likely to be eps accretiive in FY2020 (excluding remediation costs)."

"FY2019 (non-interest) income likely to fall to 25% of FY2018 Income due to decline in advisers and exit of the business."
"Operating expenses were expected to fall in FY2019 with most costs to be eliminated in FY2020."

The information below may be found in the question and answer session towards the end of the referenced presentation.

https://edge.media-server.com/m6/p/gu6k6yi4

"Westpac has budgeted $200m for restructuring costs in 1HY2019 with a further $50-100m of costs to be split between 2HY2019 and FY2020." (excluding remediation costs)
"Of this $200m wind down estimate, 40% is in relation to one off transactions and redundancies, 40% is spent unplugging from the existing business arrangements and 20% is spent plugging into new business operating paths that replace the old."

I am interpreting that as only 2/3 s of the $260m of operating expenses will be able to be discharged over FY2019, leaving 1/3 ($87m) to work through over FY2020. I estimate the average level of expenses over the FY2019 period to be: 0.5 x ($260m + $87m) = $174m




FY2018 (as presented)FY2019 (estimate)


Non-interest Income$185m$46m


less Operating Expenses($260m)($174m)


equals Core Earnings($75m)($128m)


less Tax and Other$22m$38m


equals Total($53m)($90m)



SNOOPY

[Snoopy]

Westpac Group (WBC)FY2016FY2015FY2014FY2013FY2012


Normalized Profit {A}$7,605m$7,527m$7,338m$6,792m$6,328m


Shares on Issue EOFY {B}3,313m3,140m3,114m3,087m3,043m


Earnings Per Share {A}/{B}$2.30$2.40$2.36$2.20$2.08



A lower year on year result in FY2016 is not enough to obscure a longer term trend.

Conclusion: Pass Test


Westpac produce their own 'Cash Earnings' figure that backs out temporary exchange rate and hedged asset valuation movements. However, in my judgement this is insufficient to produce a real background picture of how WBC operates. Thus I have composed my own take on producing normalised operational figures, as detailed in the table below:



FY2019FY2018FY2017FY2016
FY2015Reference


WBC declared 'Cash Profit'$6,849m$8,065m$8,062m$7,822m$7,820mAR2019 p158, AR2017 p136


less Retrospective Bank Levy Adjustment (1)$0m$0m0.7($373m-$95m)0.7x($351m)0.7x($331m)My post 153


add 'Naughty Bank' Customer Remediation (2)$958m$281m$0m$0m$0mMy post 139


add Wealth Division Reset (2)$172m$0m$0m$0m$0mMy post 139


add Insurance Arm Adjustment (2)$58m$0m$0m$0m$0mMy post 139


less Pendal Dividend Received (3)($16m)($13m)($37m)($34m)($61m)My post 164


less 'Ordinary Person Savings Advice' reversed$90m$53m$10m($7m)($11m) My post 235


add 'BTFG' wind down back office saving0.7x$20m0.7x$20m0.7x$20m0.7x$20m0.7x$20m
My post 234


equals WBC post Pendal & Advice Business sale 'Normalised Profit'$8,124m$8,400m$7,854m$7,549m$7,544m



As you can see by my references, this post is a long awaited conglomeration of a series of my other posts. It is the best I can do for now and I am generally satisfied with the result. But as you can read in the notes below, there are a couple of loose ends that maybe readers can solve.

Notes

(1) Australia implemented a tax deductible 'Bank Levy' during 2017. This was applied to ANZ, CBA, WBC, NAB and MacQuarie Banks. This means the full levy was not paid by Westpac over 2017 and was not paid at all over FY2015 and FY2016. Government taxation policy should IMO not be used to distort the operational performance of the bank over comparable periods. To compensate for this, have made an adjustment in each of FY2017, FY2016 and FY2015. The adjustment restates the result assuming that the bank levy applied equally over all five years that I am comparing.

(2) I am not fully convinced by my 'Insurance Arm Adjustment' , which is really a fudge factor because two comparable references to figures in two different parts of AR2019 that should add up to $1130m do not. Other information I have found that might support my argument is slide 75 on the 2019 Investor presentation. In the bottom RH corner there is information on insurance income. If you add up the General, Loan Mortgage Insurance and NZ 'Insurance Income' over FY2019 I get $267m, while over FY2018 the total was $334m. That is a drop of $67m over the year. That doesn't equal my $58m drop in the table above. (I should note here that the drop I am referring to would be caused by a change in the balance of premiums and claims.) Personally I didn't know Westpac was in the insurance market in NZ until today, although it seems all Westpac NZ is underwritten by IAG. So it may be a very small commission only operation? A drop of $9m in NZ would leave $58m as the drop in the Australian market, as in my table. OK I admit I am grasping at straws here to make things balance!

(3) If you look in the Annual Report references in the table above, you will see that in deriving their 'cash' result, WBC have already made adjustments for their changing shareholding in Pendal Group. So why have I made additional adjustments? If you look in my post 228 it appears these were only capital valuation adjustments. Of particular interest is FY2016 where no adjustment was made by Westpac. Yet I know for sure that Westpac was entitled to a dividend of value $34.060m that found its way into the Westpac coffers that year (my post 164). This to me is proof that those Pendal dividends paid to Westpac have not been adjusted out by Westpac, which is why I have done it separately.
There is one other odd twist to this tale. If you go to note 4 in AR2019, the table of 'Non-interest income', you can see that 'dividends received from subsidiaries' are only recorded in the 'Parent Entity' and not the 'Consolidated Entity'. Could it be that the reason Westpac did not remove dividends from Pendal when they did their cash calculation adjustments be because those dividends never found their way into the 'Consolidated Entity' in the first place? If true, that would explain why Westpac ignored the dividends when they made their 'Cash Calculation' adjustment. But that begs another question. By what accounting standard would Westpac be allowed to ring fence external dividends from their 'Consolidated Entity'. I find this particular situation baffling. But I have stuck to my belief that these dividends should be removed from the Consolidated result.

SNOOPY

[Snoopy]

Westpac Group (WBC)FY2016FY2015FY2014FY2013FY2012


Normalized Profit {A}$7,605m$7,527m$7,338m$6,792m$6,328m


Shares on Issue EOFY {B}3,313m3,140m3,114m3,087m3,043m


Earnings Per Share {A}/{B}$2.30$2.40$2.36$2.20$2.08



A lower year on year result in FY2016 is not enough to obscure a longer term trend.

Conclusion: Pass Test



It has been a long wait since my post 154 on 13th March with the first Buffett test. But at last we can progress.



Westpac Group (WBC)FY2019FY2018FY2017FY2016FY2015


Normalized & Adjusted Profit {A}$8,124m$8,400m$7,854m$7,549m$7,544m


Shares on Issue EOFY {B}3,490m3,435m3,394m3,346m3,184m


Earnings Per Share {A}/{B}$2.33$2.45$2.31$2.26$2.37



No rising 'eps' trend is apparent 'longer term'. There are two setbacks within five years

Conclusion: Fail Test

SNOOPY

[Snoopy]

My best guess so far is that Westpac will be facing a fine of between $A20m and $A483,000m

Can I narrow that down a bit further?

https://qz.com/1754928/australias-westpac-bank-sued-for-violations-enabling-pedophilia/

"Austrac’s current record fine was issued against Commonwealth Bank for A$700 million. But its number of violations was less than 2% of Westpac’s 23 million total."

So let's extrapolate Westpac's potential fine based on their errant transaction level.

$700m / 0.02 = $35,000m. Hmmmm

"Overall, Austrac found 12 customers who together had sent more than 3,000 payments worth around $340,000 to child abusers in the Philippines and elsewhere in Southeast Asia."

That is a rate of 250 incidents per rogue customer.

Of the 23m breaches noted at Westpac, then that would imply 92,000 rogue customers.

Using an A$17-A$21 million penalty per rogue customer (a punishment rate I just made up), I get an overall fine of $1,564b to $1,932b. That several orders of magnitude larger than the $0.700b CBA fine. But the banking environment has changed in the Covid-19 environment. A fine of materially more than $700m at this time could cause WBC and, as a consequence, the rest of the banking system in Australia to become unstable. Would a court risk that? Or would the legal system carry on down their path regardless of the economic consequences of any fine imposed?


More bad news on potential Westpac liabilities on the customer payments for pedophilia scandal is contained within a 28th July 2020 press release.

https://stocknessmonster.com/announcements/wbc.nzx-356959/

"The Group had self-reported Threshold Transaction Report (TTR) issues to AUSTRAC, including TTRs filed with incomplete or inaccurate information as well as an estimated 60,000 to 90,000 TTRs that had not been reported to AUSTRAC. Following further investigations and in response to a notice from AUSTRAC, Westpac has provided AUSTRAC with updated information relating to these TTR issues, including approximately 175,000 transactions that were not reported to AUSTRAC and approximately 365,000 TTRs that were reported to AUSTRAC but may have contained incomplete or inaccurate information."

The number of 'Threshold Transaction Report' cases has near doubled. The fact that half of the reported transactions are now 'late to be reported' will not please AUSTRAC. If penalties are dished out on a per transaction basis, then we could be looking at a doubling of a potential fine for Westpac. In dollar terms that means three to four billion dollars. And that is no 'wet bus ticket' for Westpac shareholders!

SNOOPY

[Snoopy]

I am about to do some Return on Equity (ROE) calculations for Westpac Bank. But the Westpac Bank that I want to study is today's Westpac, not yesterdays. Two businesses within Westpac have been sold of late.

1/ The remaining interest in formerly owned subsidiary 'Pendal Group' which is a unit trust fund operator. Pendal is a separately listed company on the ASX in its own right and the price at which Westpac has over the years offloaded their stake in different tranches is known.

2/ The 'Ordinary Person Financial Advice' business, which was looked after by in house Westpac advisors has been stopped. An independent company Viridian has acquired the client servicing rights for 'certain customers'. According to Slide 17 from the FY2019 'Presentation and Investor Discussion Pack', 14,000 individual customers from Westpac have elected to move across and take their investment advice going forwards from Viridian. The handover happened on July 1st 2019 and Viridian paid $10m to Westpac to acquire the financial advice servicing rights for these still Westpac bank customers. That equates to just over $700 per customer acquired.

I have already backed out the earnings of these sold divisions when I examined the historical earnings of Westpac, Now I need to back out the equity of these two sold divisions from the bank's balance sheet. Shareholder Equity only makes up a small proportion of the funds that banks use to operate. Dwarfing a bank's equity, WBC assets are largely funded by deposits from customer and wholesale funding arrangements like securitised loans, covered bonds and other inter-bank arrangements. The actual equity to liability ratio, showing from where bank balance sheet assets are funded for the five years we are studying, can be derived from information in AR2019 on page 76. The table below uses figures from this page.



Shareholder Equity {A}Shareholder Assets {B}Equity Ratio {A}/{B}


FY2015$53,915m$812,156m6.639%


FY2016$58,181m$839,202m6.933%


FY2017$61,342m$851,875m7.201%


FY2018$64,573m$815,019m7.923%


FY2019$65,507m$841,119m7.788%


HY2020$67.646m$967,662m6.991%




Why have I created the above table? When a bank sells an asset, it is more correct to think of the bank selling the equity part of the asset that they own, while dispensing with the need for the associated outside funding (largely from bank depositors) needed to 'own' the whole thing. Here are our two examples, that show how I have calculated the Westpac equity 'released' in all the whole and partial asset sales that cover the disposal of the two businesses we wish to write out of the balance sheet..


(Reference posts 148, 165 and 169 for more Pendal sales details in context)

--------

1a/ On 23rd June 2015 Westpac reduced their 60.8% holding in BTIM to 31.0% with an institutional and retail offer at $8.20 per share. The total value of shares sold was:

$8.20 x( 172,800,001 - 90,814,493 ) = $672m

Westpac made a gain in two ways doing this. The gain included a 'realised gain' of the 28% of BTIM sold ($492m) and an 'unrealised gain' of the 31% interest retained ($544m). This resulted in a total pre-tax gain of: $492m + $544m = $1,036m (AR2015 p77/p135/p245). After tax this equates to a gain of:

$1,036m x 0.7 = $725m

If the gain on the shares sold was $492m, that means the book value of the shares sold, just prior to sale was:

$672m - $492m = $180m

The total reduction of capital after eliminating this sale from the accounts is therefore: $725m +$180m = $905m

The reduction in shareholder equity associated with this sale is therefore:

$905m x 0.06639 = $60m

-------

1b/ On 26th May 2017 Westpac sold a further 19% of BTIM/Pendal (carrying value $471m) reducing their holding to 10% (residual carrying value $242m). The result was a net gain (net of transaction costs before tax) of $279m (AR2017 p139/p227).

The total value of shares sold was

$12.79 x ( 90,814,493 -30,814,493 ) = $767m

Westpac made a gain in two ways doing this. The gain included a 'realised gain' of the 19% of BTIThe gain included a 'realised gain' of the 28% of BTIM sold ($492m) and an 'unrealised gservicingain' of the 31% interest retained ($544m). This resulted in a total pre-tax gain of: $492m + $544m = $1,036mThe gain included a 'realised gain' of the 28% of BTIM sold ($492m) and an 'unrealised gservicingain' of the 31% interest retained ($544m). This resulted in a total pre-tax gain of: $492m + $544m = $1,036mM/Pendal sold ($159m) and an 'unrealised gain' of the 10% interest retained that was marked to market on the next balance date ($133m). This resulted in a total pre-tax sales gain over the year of: $159 + $133m = $292m, that was reduced to $279m taking out sales costs. After tax this equates to a gain of:

0.7 x $279m = $195m

If the gain on the shares sold was $159m, that means the book value of the shares sold, just prior to sale was:

$767m - $159m = $608m

The total reduction of capital after eliminating this sale from the accounts is therefore: $608m + $195m = $803m

The reduction in shareholder equity associated with this sale is therefore:

$803m x 0.07201 = $58m

-------

1c/ On 18th June 2020 Westpac reduced their holding in Pendal Group from around 10% to 0%.

The shares were put out to tender at a price of $5.98. This equates in capital value for the remaining Westpac Pendal stake to be:

$5.98 x 30,814,493 = $184m

The reduction in shareholder equity associated with this sale is therefore:

$184m x 0.06991 = $13m


-------

2/ The 'Ordinary Person Financial Advice' business, was sold to Viridian for $10m in FY2019. Using the above table we can work out the reduction in bank shareholder equity associated with that sale.

$10m x 0.07788 = $0.7788m. Let's call that $1m as we are dealing in significant figures rounded to the nearest million.

-------

So, adding all these 'equity withdrawn' figures up....

Total Shareholder Equity Withdrawn is ($60m+$58m+$13m )+ $1m = $132m

SNOOPY

[Snoopy]

Westpac Group (WBC)FY2016FY2015FY2014FY2013FY2012


Normalized Profit {A}$7,605m$7,527m$7,338m$6,792m$6,328m


Shareholder Equity EOFY {B}$58,181m$53,915m$49,337m$47,537m$46,219m


Return on Shareholder Equity {A}/{B}13.1%14.0%14.9%14.3%13.7%



We aren't far away from that 15% ROE hurdle in any of the last five years. But near enough is not good enough.

Result: Fail Test



In calculating 'Return of Equity', I have adjusted the shareholder equity by the amount calculated in my post 239, to take account of two subsidiary businesses that I have removed from the earnings picture.




Westpac Group (WBC)FY2019FY2018FY2017FY2016FY2015


Normalized & Adjusted Profit {A}$8,124m$8,400m$7,854m$7,549m$7,544m


Shareholder Equity EOFY {B}$65,507m-$132m$64,573m-$132m$61,342m-$132m$58,181m-$132m$53,915m-$132m


Return on Shareholder Equity {A}/{B}12.4%13.0%12.8%13.0%14.0%



With the proviso that we are looking at a pre-Covid-19 scenario, the underlying background picture is remarkably steady in 'Return on Equity' terms. O.K. I can see a trend of modest decline. if you go to the first decimal point. But given the tougher banking environment that has existed since the GFC, the underlying Westpac continues to operate well in a challenging market. 12.4% ROE is not a return to be ashamed of, even if it wouldn't satisfy an investor like Warren Buffett who reserves the right to pick and choose whereabouts he invests.

Result: Fail Test

SNOOPY

[Snoopy]

To calculate 'net profit margin' figures, as used in the fourth Buffett test, I require company revenue figures. I need to identify what revenue adjustments that I need to make to allow for the removal of 'Pendal Group' and 'Ordinary Customer Financial Advice' from the overall Westpac (WBC) business. I will start by looking at the situation with the Pendal Group.

Pendal Group Revenue Adjustments

FY2015

Before 23rd June 2015, Pendal (or BTIM as it was named then), being over 50% owned by Westpac, was consolidated into the Westpac accounts. BTIM revenue for FY2015 consisting of:

a/ 'management fees',
b/ 'performance fees' and
c/ 'transaction fees'

This came to a grand total of $476.535m (BTIM AR2015 p76). Westpac owned 60% owned BTIM as a consolidated subsidiary for 268 days of a 365 day year over FY2015. This means the amount of BTIM revenue reported in the WBC FY2015 accounts should be approximately:

$476.535m x (268/365) =$320.554m

It is likely that this income appears under p135 Note 4 in WBC AR2015. 'Management fees' being probably classified under the header 'Other non-risk fee income', while 'performance fees' and 'transaction fees' might fit best subsumed in the header 'Transaction fees and commissions received'.

Once WBC's BTIM share holding dropped below 50% (after 25th June 2015), thereafter there should be no 'Pendal Revenue' as such, because Pendal then becomes an 'Associate' rather than a 'Subsidiary'. As an 'Associate' the revenue from Pendal is now in the form of:

1/ dividends and
2/ any substantial changes in capital value of the asset should it be sold down further during that year.

Any such capital gain on a sell down is booked by Westpac as 'non-interest income' in the profit and loss statement. That capital will have to be taken out of my revised WBC revenue picture.

In this case, the FY2015 capital value gain included a 'realised gain' of the 28% of BTIM sold ($492m) and an 'unrealised gain' of the 31% interest retained ($544m). This resulted in a total pre-tax gain of: $492m + $544m = $1,036m (AR2015 p77/p135/p245). This $1,036m is the 'capital revenue' that I must be remove.

The Pendal sell down in FY2015 occurred after the payment of all Pendal dividends in that year. So all the dividends from Pendal by WBC in FY2015 are from the number of shares held pre-sell-down..

=> Total of all Pendal Revenue to be removed over FY2015 = $321m + $1,036m = $1,057m


FY2016

As an 'Associate' from Westpac's perspective, Pendal dividends are the only source of revenue that came into the WBC income statement over FY2016.




Dividend Payment DateDividend (cps)Dividend AmountWestpac Percentage Shareholding
Dividend Payout to Westpac




02-12-201520cps (40% Franked)$57.206m31.04%
$17.75Asset following7m




26-05-201618cps (40% Franked)$52.521m31.04%
$16.303m



=> Total of all Pendal Revenue to be removed over FY2016 = $17.757mm + $16.303m = $34m

FY2017

Pendal continued as an Associate over FY2017 until the 25th of May 2017. WBC's share of dividends over this time is presented in the table below





Dividend Payment DateDividenwilld (cps)Dividend AmountWestpac Percentage Shareholding
Dividend Payout to Westpac

will
=> Total Revenue to be removed over FY2016 = $17.757mm + $16.303m = $34m


08-12-201624cps (35% Franked)$71.365m29.54%$21.081m



25-05-201719cps (30% Franked)$54.653m29.54%
$16.14Asset following4m



On 26th May 2017 Westpac sold a further 19% of BTIM/Pendal (carrying value $471m) reducing their holding to 10% (residual carrying value $242m). The result was a net gain (net of transaction costs before tax) of $279m (AR2017 p139/p227). This gain is recorded in the income statement and so it becomes revenue that must be removed. (Following this sell down the remaining holding in Pendal became reclassified as an 'Available for Sale' asset.)

=> Total of all Pendal Revenue to be removed over FY2017 = $21.081m + $16.144m + $279m = $316m

FY2018

Pendal, as an 'Available for Sale' asset, paid WBC their share of dividends over the year as presented below:




Dividend Payment DateDividend (cps)Dividend AmountWestpac Percentage Shareholding
Dividend Payout to Westpac



07-12-201726cps (25% Franked)$78.191m8.99%$7.029m



25-05-201822cps (15% Franked)$65.565m8.99%
$5.894m



As an 'Available for Sale Asset', the annual change in value of that asset was recorded in the WBC income statement (AR2018 p143). Over FY2018 there was a $104m write down in the residual value of 'Pendal Group' (p160 AR2018).

=> Total of all Pendal Revenue to be removed over FY2018 = $7.029m + $5.894m - $104m = -$91m

FY2019

The WBC owned Pendal shareholding, previously classified as an 'Available for Sale' asset, has been reclassified as an 'Investment Asset', following the adoption of new accounting standard 'AASB 9'. Over FY2019 the accounting for the Pendal asset has been combined with other investment securities (p175 AR2019). Consequently for this year, it will be necessary for me to calculate the decline in Pendal asset value over the year for myself.

At EOFY2018 the Pendal share price was $8.79. This represents a capital dollar value of: $8.79 x 30.814493m = $270.859m
At EOFY2019 the Pendal share price was $7.39. This represents a capital dollar value of: $7.39 x 30.814493m = $227.719m

So the capital loss for the FY2019 year on the Pendal stake was: $227.719m - $270.859m = -$43.140m

WBC's share of dividends over the year from their Pendal 'investment asset' is presented below:




Dividend Payment DateDividend (cps)Dividend AmountWestpac Percentage Shareholding
Dividend Payout to Westpac



06-12-201830cps (15% Franked)$89.873m10.40%$9.347m



23-05-201920cps (10% Franked)$59.897m10.40%
$6.229m



=> Total of all Pendal Revenue to be removed over FY2019 = $9.347m + $6.229m - $43m = -$27m

Next I will look at part 2 of this exercise, namely removing 'Ordinary Customer Financial Advice' from my Westpac revenue picture.

SNOOPY

[Snoopy]

Next I will look at part 2 of this exercise, namely removing 'Ordinary Customer Financial Advice' from my Westpac revenue picture.


The information in this post may be principally found in the March 19th 2019 stock exchange release "Resetting Westpac's Wealth Strategy". The table is compiled 'bottom up'. That means starting with the 'net profit after tax' and working backwards.


Earnings from 'Ordinary Customer Financial Advice'




FY2015 (estimate)
FY2016 (as presented)
FY2017 (as presented)
FY2018 (as presented)
FY2019 (estimate)


Non-interest Income
$276m
$270m
$246m
$185m
$46m


less Operating Expenses
($260m)
($260m)
($260m)
($260m)
($174m)


equals Core Earnings
$16m
$10m
($14m)
($75m)
($128m)


less Tax and Other
($5m)
($3m)
$4m
$22m
$38m


equals Net Profit After Tax
$11m
$7m
($10m)
($53m)
($90m)



Notes

1/ Where tax due/refunds are calculated, the assumed tax rate is 30% (rounded to the nearest million dollars in terms of the dollar amount of tax paid)..
2/ I have assumed that the business unit operating expenses of FY2018 are reflective of the operating expenses incurred in the preceding three years.
3/ The 'Advice to Ordinary People' profit for FY2015 is not specifically disclosed. However we do learn from the FY2016 "Full Year Financial Results Presentation" slide 99 that: "Advice Income is lower from Reduced Activity." On the same page we learn that Average funds under Management over FY2016 was: ($17.8b + $18.3b)/2 = $18b verses ($19.8b +$18.3b)/2 = $19b over FY2015. That is a drop of $1billion. I am guessing incremental retail advice fees on such a portfolio would amount to 0.5% of the value of that portfolio.

0.005 x $1billion = $5m, or $5m x 0.7 = $3.5m after tax

So if this is the amount lost over FY2016 from the previous year, that means a good estimate of the 'Advice Fees' for FY2015 is : $7m + $3.5m = $10.5m (rounds to $11m)

The most important line of figures in the table is the top one that I have highlighted in bold. That is because the 'non interest income' is actually the revenue figure for the earnings from 'Ordinary Customer Financial Advice' that I am after. Having calculated that, we can now add up the total revenue that I require to deduct from Westpac revenue as presented in the respective annual reports.




FY2015
FY2016
FY2017
FY2018
FY2019


Revenue 'Ordinary Person Financial Advice'
$276m
$270m
$246m
$185m
$46m


Revenue 'Pendal Group'
$1,057m
$34m
$316m
($91m)
($27m)


Total Revenue for removal
$1,333m
$304m
$562m
$94m
$19m



SNOOPY

[Snoopy]

Westpac Group (WBC)FY2016FY2015FY2014FY2013FY2012


Normalized Profit {A}$7,605m$7,527m$7,338m$6,792m$6,328m


Gross Interest Revenue {B}$31,822m$32,215m$32,248m$33,009m$36,873m


Net Profit Margin {A}/{B}23.9%23.3%22.8%20.6%17.2%



A 'steady with inflation increase in margins over the last three comparative figures, and a rather stronger rise before that.

Result: Pass Test


In the previously quoted figures I have given as a comparison I did not include non-interest income in revenues. On reflection I think that was a mistake, which I have corrected in this current iteration of my calculations.



Westpac Group (WBC)FY2019FY2018FY2017FY2016FY2015


Normalized & Adjusted Profit {A}$8,124m$8,400m$7,854m$7,549m$7,544m


Gross Interest Revenue $33,222m$32,571m$31,232m$31,822m$32,295m


add Gross Non-Interest Revenue $3,742m$5,628m$6,286m$5,837m$7,375m


less Discontinued Divisional Revenue adjustment ($19m){$94m)($562m)($304m)($1,333m)


equals Gross Revenue Total {B}$36,945m$38,105m$36,956m$37,355m$39,319m


Net Profit Margin {A}/{B}22.0%22.0%21.3%20.2%19.2%



Despite stalling (on a high I might note) in FY2019, the ever increasing net profit margin is clear to see.

Result: Pass Test

SNOOPY

[Snoopy]

Warren Buffett's scanning of the 'growth potential' of a company can be summarized in four quick questions.

Q1/ Does Westpac Group have a top three market position in the markets in which it chooses to operate? (Ref: my post 32)
A1/ Yes

Q2/ Does Westpac Group have a 'normalised profit' increasing 'earnings per share trend'? (Ref: my post 39)
A2/ Yes

Q3/ Does Westpac Group have a record of earning a superior ( >15% ) return on shareholder equity? (Ref: my post 41)
A3/ No

Q4/ Does Westpac Group have the capability of operating at increasing Net Profit margins? (Ref: my post 42)
A4/ Yes

Overall Conclusion

Westpac is not able to satisfy all the requirements to apply Warren Buffett's compounding growth model. This does not mean that Westpac is necessarily a poor investment going forwards. It just means that Westpac must be analyzed in a different way. It might be sensible to regard Westpac as a pure 'dividend play' from here.


Following on from my extensive look at Westpac, three long years ago, it is time to sew up my FY2019 research expedition.

I have set out to answer the question: "Would Warren Buffett invest in the Westpac bank today?" About the same time I posed this question to myself (December 2019), I found Motley Fool in Australia asked exactly the same question.

https://www.fool.com.au/2019/12/06/would-warren-buffett-buy-westpac-shares-right-now/

As it turns out we have both come to the same conclusion, albeit for rather different reasons. The Australian banking market's 'Four Pillars' of strength (Commonwealth Bank of Australia, Westpac, ANZ and National Australia Bank) have, over the last ten years, weathered the fall out from the GFC and the subsequent rebuilding processes better than any other international scale banks I can name anywhere in the world. The scale of Westpac in Australasia means that it is 'too big to fail'. Indeed it is hard to imagine a competitor emerging to the big four, such is their size and reach across markets. With their market position secure (that is what a pass in the first Buffett test, my post 154 is all about) we can now move on to look at the 'business operating trends' by numbers.

My post 237 shows good earnings growth if you regard the FY2019 year as an allowable cyclical drop off. It is a very rare business that can increase their earnings each and every year if they have a history of 200 years of operation after all. But the 'Earnings Per Share' picture is not so flattering. Issuing more shares to fund your expansion is not necessarily a way to increase the wealth of all shareholders. 'Westpac' had a share issue in FY2016 at the 'bargain' price of $A25.50. The flat-lining in 'eps' since this capital was fully deployed in FY2017 could suggest that the incremental expansion of the business that this new capital allowed has not been well deployed. This is a very good example of why increasing 'eps' is a far more important metric than just increasing profits. So a fail for 'Westpac' on the 'Earnings per Share' test.

'Return on Shareholder Equity' is another failure, where the admittedly stretch target of 15%, has not looked like being met at any time in the last five years (my post 240). However our mate Adrian in the Reserve Bank is on record as saying that with deposit interest rates hovering at around 1%, banks should be more than happy with a 12% return on shareholder equity. I am starting to wonder if he has a point.

The fourth and final 'Buffett Test' relates to net profit margins. It is no secret that as interest rates fall there is a tendency for interest rate margins to be squeezed. But interest rate margins are only one part of the cost equation. It is clear that Westpac have managed their overall margins very well as profit margins are only increasing. That is something I didn't expect, and that result means a 'strong pass' for this Buffett test.

In summary, while Westpac has not met the high Buffett hurdles required for investment, what emerges from this analysis is evidence of a strong and enduring business. The failure on 'return on equity' for example, could also be interpreted as the company building up their equity base so that it is more resilient for that 'rainy day'. And with that rainy day, in the form of Covid-19, now here I find it hard to criticise Westpac for building up their equity reserves over the last few years. We have to remember that this whole analysis is pre-Covid-19. Just because a company fails at Buffett's test hurdles does not mean it is a poor investment. WBC has an extraordinary historical record of delivering a strong dividend stream for example. But the Australian government have put their banks on 'dividend notice' and that has seen Westpac's dividend suspended. Nevertheless it is important to 'not be too fixated on the moment' and be able to look through the current Covid-19 panic to see what kind of Westpac will emerge on the other side. To really decide if WBC is a good investment from here, we need to do some stress testing on WBC's resilience. And that is a separate exercise.

SNOOPY

[Snoopy]

Aussie banks not expected to be performing well, with new government regulations.


The above comment co-incided with the arrival of the 'bank levy' in Australia. But I haven't seen much in the NZ media about how the Australian state and federal governments are helping Aussie citizens, businesses and banks through the Covid-19 crisis. Here are some excerpts from the HY2020 report on the subject.

From p33:

"The impact of the COVID-19 pandemic on the Australian economy and the Group remains uncertain. The severity of its impact will depend on its spread and duration, customer responses, the capital markets reaction and the response of governments and central banks."

From p37:

"On 19 March 2020, the (Australian) Reserve Bank announced extensive measures aimed at providing liquidity to financial markets and to support the banks in providing credit to businesses:

1/ Lowering the cash rate, these measures included
2/ Injecting extra liquidity into the financial system through daily market operations,
3/ The purchasing of Australian Government bonds in the secondary market,
4/ Increasing the interest rate on Exchange Settlement Balances, and
5/ The introduction of the Term Funding Facility (TFF).

Introduction of the Term Funding Facility (TFF)

"The primary purpose of the TFF is to support lending to Australian businesses. In aggregate, ADIs (Authorised Deposit Taking Institutions) have access to at least $90 billion under the TFF, comprised of an Initial Allowance for each ADI, plus an Additional Allowance. Based on the terms of the facility, Westpac’s Initial Allowance is $17.9 billion and can be drawn down until 30 September 2020. The Additional Allowance is based on the growth in lending provided by the ADI to both large businesses and SMEs from the quarter ending."


From p37: Committed Liquidity Facility (CLF)

"Westpac’s CLF allocation for the 2020 calendar year, as approved by APRA, is $52 billion (2019 calendar year: $54 billion). The CLF is a commitment by the RBA to provide funds secured by high-quality collateral through a period of liquidity stress. This commitment can be counted by ADIs towards meeting the LCR requirement given the limited amount of government debt in Australia. In order to have access to a CLF, ADIs must satisfy qualifying conditions and are required to pay a fee to the RBA on the approved undrawn facility. The fee was increase by the RBA on 1 January 2020 to 17 basis points (from 15 basis points) and will increase to 20 basis points on 1 January 2021."


From p37: Non-High Quality Liquid Assets (HQLA)

"The Group also holds a portfolio of non-HQLA liquid assets that are repo-eligible (eligible for re-purchase with a central bank) with the Reserve Bank of Australia. These include private securities and self-originated AAA-rated mortgage backed securities."

From p37: High Quality Liquid Assets (HQLA)

"At 31 March 2020, Westpac held $121.0 billion in HQLA (30 September 2019: $89.9 billion). HQLA include cash, deposits with central banks, government securities and other high quality securities that are repo-eligible with the RBA. The HQLA portfolio is managed within the Group’s risk appetite and within regulatory requirements. "

Westpac now has in place (from p46) a

"$10 billion home lending fund to support the economy by assisting more Australians into home ownership as well as support for the Government’s Coronavirus SME Guarantee Scheme.

From p69 Job keeper Payments

"The Australian Government announced a $130 billion JobKeeper payment on 30 March 2020." (The JobKeeper Payment scheme is a temporary subsidy for businesses significantly affected by coronavirus (COVID-19). Eligible employers, sole traders and other entities can apply to receive $1,500 per eligible employee per fortnight.)

On 21 July the Australian government announced proposed changes to JobKeeper including an extension through to 28 March 2021. These changes do not impact JobKeeper payments until after 28 September 2020. The payment will be stepped down and paid at two rates. From 28 September 2020 to 3 January 2021, the payment rate will be $1,200 per fortnight. From 4 January 2021 to 28 March 2021, the payment rate will be $1,000 per fortnight.

All the above government support has allowed Westpac to do the following:

Westpac's Response to Government Initiatives

From p69
"In response to the current COVID-19 pandemic, Westpac has provided support to its customers by implementing a range of initiatives, such as lowering interest rates on certain products, waiving certain fees and granting deferrals of mortgage and business loan repayments to customers affected by the COVID-19 pandemic"

From p73
"The economic disruption caused by the COVID-19 pandemic has led Westpac and other major banks to offer certain mortgage and business customers a deferral of certain interest and principal repayments of between 3 and 6 months." (During this period, the deferred interest will be capitalised and the deferred principal along with the capitalised interest, will be repaid over the remaining term of the loan.)

The Australian government is fully supportive of 'mortgage repayment holidays'

From p77
"Where a support package provides an option to defer repayments for a period of time, for RWA (Risk Weighted Asset) calculation purposes, a bank need not treat the period of the repayment holiday as a period of arrears (provided the borrower had previously been meeting their repayment obligations)."

SNOOPY

[RTM]

http://nzx-prod-s7fsd7f98s.s3-website-ap-southeast-2.amazonaws.com/attachments/WBC/360301/331416.pdf

recommend to the Court that Westpac pay a civil penalty of $1.3 billion in
relation to admitted contraventions of the Anti-Money Laundering and
Counter-Terrorism and Financing Act 2006 (AML/CTF Act).

Solid penalty. Guess they will be happy to have this behind them.

[Waltzing]

amazing that this industry should attract such honest types..

[Snoopy]

More bad news on potential Westpac liabilities on the customer payments for pedophilia scandal is contained within a 28th July 2020 press release.

https://stocknessmonster.com/announcements/wbc.nzx-356959/

"The Group had self-reported Threshold Transaction Report (TTR) issues to AUSTRAC, including TTRs filed with incomplete or inaccurate information as well as an estimated 60,000 to 90,000 TTRs that had not been reported to AUSTRAC. Following further investigations and in response to a notice from AUSTRAC, Westpac has provided AUSTRAC with updated information relating to these TTR issues, including approximately 175,000 transactions that were not reported to AUSTRAC and approximately 365,000 TTRs that were reported to AUSTRAC but may have contained incomplete or inaccurate information."

The number of 'Threshold Transaction Report' cases has near doubled. The fact that half of the reported transactions are now 'late to be reported' will not please AUSTRAC. If penalties are dished out on a per transaction basis, then we could be looking at a doubling of a potential fine for Westpac. In dollar terms that means three to four billion dollars. And that is no 'wet bus ticket' for Westpac shareholders!



http://nzx-prod-s7fsd7f98s.s3-website-ap-southeast-2.amazonaws.com/attachments/WBC/360301/331416.pdf

recommend to the Court that Westpac pay a civil penalty of $1.3 billion in
relation to admitted contraventions of the Anti-Money Laundering and
Counter-Terrorism and Financing Act 2006 (AML/CTF Act).

Solid penalty. Guess they will be happy to have this behind them.


It looks like when I typed out part 6 of this series that I dropped three decimal places in my fine estimate. It should have read three to four trillion dollars. Put in that light the $1.3billion dollar actual fine seems a bargain. But it probably means no final dividend either. $1.3billion is $400m over the forecast provision for this settlement. And this is only one of several disputed matters that Westpac might be best to settle out of court.

SNOOPY

[Waltzing]

Another cap raise possible. Still got the USA case to come. Great trading stock going forward.