WBC - Westpac

[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)
02-07-2014	0.90	0.9272	0.9707	0.0600	1.0307
19-12-2014	0.92	0.9474	0.9711	0.0600	1.0311
02-12-2015	0.93	0.8806	1.0561	0.0600	1.1161
21-12-2015	0.94	0.9412	0.9987	0.0600	1.0587
04-07-2016	0.94	0.9601	0.9791	0.0700	1.0491
21-12-2016	0.94	0.9529	0.9865	0.0700	1.0565
04-07-2017	0.94	0.9577	0.9815	0.0700	1.0515
22-12-2017	0.94	0.9105	1.0325	0.0700	1.1025
04-07-2018	0.94	0.9151	1.0272	0.0700	1.0972
20-12-2018	0.94	0.9526	0.9868	0.0700	1.0568
24-06-2019	0.94	0.9503	0.9892	0.0700	1.0592
20-12-2019	0.80	0.9595	0.8338	0.0700	0.9038
Total			11.81	0.80	12.61

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 FY2019	AR2019: Impairment FY2018	Reference	AR2018: Impairment FY2018	Reference
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.

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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).

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

Financial Year	Ex-dividend date	Dividend per Share	Dividend Payout	Westpac %ge Shareholding	Payout to Westpac	Sum over Financial Year Payout to Westpac
----------	----------	----------	----------	----------	----------	----------
FY2015	03-12-2014	19cps (35% Franked)	$52.891m	60.76%	$32.137m
	13-05-2015	17cps (40% Franked)	$47.159m	60.76%	$28.634m	$60.771m
----------	----------	----------	----------	----------	----------	----------
FY2016	02-12-2015	20cps (40% Franked)	$57.206m	31.04%	$17.757m
	26-05-2016	18cps (40% Franked)	$52.521m	31.04%	$16.303m	$34.060m
----------	----------	----------	----------	----------	----------	----------
FY2017	08-12-2016	24cps (35% Franked)	$71.365m	29.54%	$21.081m
	25-05-2017	19cps (30% Franked)	$54.653m	29.54%	$16.144m	$37.225m
----------	----------	----------	----------	----------	----------	----------
FY2018	07-12-2017	26cps (25% Franked)	$78.191m	8.99%	$7.029m
	25-05-2018	22cps (15% Franked)	$65.565m	8.99%	$5.894m	$12.523m
----------	----------	----------	----------	----------	----------	----------
FY2019	06-12-2018	30cps (15% Franked)	$89.873m	10.40%	$9.347m
	23-05-2019	20cps (10% Franked)	$59.897m	10.40%	$6.229m	$15.576m
----------	----------	----------	----------	----------	----------	----------
FY2020	05-12-2019	25cps (10% Franked)	$76.078m	9.55%	$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.

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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).

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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.

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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.

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'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

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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.


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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.

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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-...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.

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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.

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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/A	N/A	N/A
FY2015	$60.771m	$1,036m	$756m (2)	N/A	N/A
FY2016	$34.060m	$0m	$718m (3)	N/A	N/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)