Retrospectively adjusting the WBC revenues: Part 1
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 Date |
Dividend (cps) |
Dividend Amount |
Westpac Percentage Shareholding |
Dividend Payout to Westpac |
|
02-12-2015 |
20cps (40% Franked) |
$57.206m |
31.04% |
$17.75Asset following7m |
|
26-05-2016 |
18cps (40% Franked) |
$52.521m |
31.04% |
$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 Date |
Dividenwilld (cps) |
Dividend Amount |
Westpac Percentage Shareholding |
Dividend Payout to Westpac |
|
08-12-2016 |
24cps (35% Franked) |
$71.365m |
29.54% |
$21.081m |
|
25-05-2017 |
19cps (30% Franked) |
$54.653m |
29.54% |
$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 Date |
Dividend (cps) |
Dividend Amount |
Westpac Percentage Shareholding |
Dividend Payout to Westpac |
|
07-12-2017 |
26cps (25% Franked) |
$78.191m |
8.99% |
$7.029m |
|
25-05-2018 |
22cps (15% Franked) |
$65.565m |
8.99% |
$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 Date |
Dividend (cps) |
Dividend Amount |
Westpac Percentage Shareholding |
Dividend Payout to Westpac |
|
06-12-2018 |
30cps (15% Franked) |
$89.873m |
10.40% |
$9.347m |
|
23-05-2019 |
20cps (10% Franked) |
$59.897m |
10.40% |
$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
Retrospectively adjusting the WBC revenues: Part 2
Quote:
Originally Posted by
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
Buffett Test 4/ FY2019: Ability to raise profit margin above inflation
Quote:
Originally Posted by
Snoopy
Westpac Group (WBC) |
FY2016 |
FY2015 |
FY2014 |
FY2013 |
FY2012 |
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) |
FY2019 |
FY2018 |
FY2017 |
FY2016 |
FY2015 |
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
Buffett Growth Model Screening (FY2019 perspective): Overall Conclusion
Quote:
Originally Posted by
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/w...res-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
An unorchestrated litany of liabilities: Part 7
Quote:
Originally Posted by
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/announc...bc.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!
Quote:
Originally Posted by
RTM
http://nzx-prod-s7fsd7f98s.s3-websit...301/331416.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