WBC - Westpac

[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-...tions/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

[percy]

ABC"s comment:

https://www.abc.net.au/news/2019-11-...tions/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.

[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]

ABC"s comment:

https://www.abc.net.au/news/2019-11-...tions/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

[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-cl...-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]

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

https://www.apra.gov.au/financial-cl...-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_Parliam...ew201718/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.

	EOFY2018	EOFY2019	FY2019 Averaged	Reference
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