sharetrader
Page 12 of 13 FirstFirst ... 28910111213 LastLast
Results 221 to 240 of 245

Thread: WBC - Westpac

  1. #221
    Legend
    Join Date
    Jun 2004
    Location
    , , New Zealand.
    Posts
    6,993

    Default Corporate Debt Stress Test based on EOFY2019 balance sheet (Data 1)

    Quote Originally Posted by Snoopy View Post

    Westpac averaged Risk Weighted Assets EOFY2019 ($m)


    Asset Categories Risk Weighted Assets {A} Exposure at Default {B} Averaged Risk Weighted Factor {A}/{B}
    Corporate 74,807 139,173 0.54
    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 Counterparty RWA Factor
    AAA to AA- 20%
    A+ to A- 50%
    BBB+ to BBB- 75%
    BB+ to BB- 100%
    Below BB- 150%
    Unrated 100%

    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
    Last edited by Snoopy; 19-05-2020 at 07:59 PM.
    Industry shorthand sees BNZ employees still called 'bankers' but ANZ employees now called 'anchors'. Westpac has opted out of banking industry shorthand...

  2. #222
    Legend
    Join Date
    Jun 2004
    Location
    , , New Zealand.
    Posts
    6,993

    Default

    Quote Originally Posted by Snoopy View Post
    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/...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/2020/04/2...n-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
    Last edited by Snoopy; 19-05-2020 at 03:54 PM.
    Industry shorthand sees BNZ employees still called 'bankers' but ANZ employees now called 'anchors'. Westpac has opted out of banking industry shorthand...

  3. #223
    Legend peat's Avatar
    Join Date
    Aug 2004
    Location
    Whanganui, New Zealand.
    Posts
    5,366

    Default

    Barramundi increased their weightings in the Australian banks, ANZ, CBA, NAB and Westpac in the middle of March
    Last edited by peat; 24-04-2020 at 01:11 AM.
    For clarity, nothing I say is advice....

  4. #224
    Member
    Join Date
    May 2007
    Location
    Auckland, , New Zealand.
    Posts
    425

    Default

    And I've recently added a few more ANZ and WBC too.

  5. #225
    Legend
    Join Date
    Jun 2004
    Location
    , , New Zealand.
    Posts
    6,993

    Default Corporate Debt Stress Test based on EOFY2019 balance sheet (Data 2)

    Quote Originally Posted by Snoopy View Post
    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 Counterparty RWA Factor
    AAA to AA- 20%
    A+ to A- 50%
    BBB+ to BBB- 75%
    BB+ to BB- 100%
    Below BB- 150%
    Unrated 100%

    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' ratio RWA 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
    Last edited by Snoopy; 19-05-2020 at 09:53 PM.
    Industry shorthand sees BNZ employees still called 'bankers' but ANZ employees now called 'anchors'. Westpac has opted out of banking industry shorthand...

  6. #226
    Legend
    Join Date
    Jun 2004
    Location
    , , New Zealand.
    Posts
    6,993

    Default Provisioning for HY2020 (Part 2)

    Quote Originally Posted by Snoopy View Post
    I finally got around to seeing the HY2020 pre-result provisioning as announced in the 14th April 2020 Press Release update.

    Provisioning for HY2020

    Item Value Notes
    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:

    Division Impairment 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/ bad 40%
    2/ expected 55%
    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
    Last edited by Snoopy; 01-07-2020 at 07:54 PM.
    Industry shorthand sees BNZ employees still called 'bankers' but ANZ employees now called 'anchors'. Westpac has opted out of banking industry shorthand...

  7. #227
    Legend
    Join Date
    Jun 2004
    Location
    , , New Zealand.
    Posts
    6,993

    Default Lost 'Available for Sale' assets found

    Quote Originally Posted by Snoopy View Post
    (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 Sheet Reclassification 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
    Last edited by Snoopy; 19-07-2020 at 10:07 PM.
    Industry shorthand sees BNZ employees still called 'bankers' but ANZ employees now called 'anchors'. Westpac has opted out of banking industry shorthand...

  8. #228
    Legend
    Join Date
    Jun 2004
    Location
    , , New Zealand.
    Posts
    6,993

    Default Summary: Multi year effect of Pendal on Westpac (by WBC)

    Quote Originally Posted by Snoopy View Post
    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), (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) $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
    Last edited by Snoopy; 30-07-2020 at 01:55 PM.
    Industry shorthand sees BNZ employees still called 'bankers' but ANZ employees now called 'anchors'. Westpac has opted out of banking industry shorthand...

  9. #229
    Legend
    Join Date
    Jun 2004
    Location
    , , New Zealand.
    Posts
    6,993

    Default Unpicking the WBC Internal Wealth Managment Business BTFG (Part 2)

    Quote Originally Posted by Snoopy View Post

    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 Earnings FY2018 (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/bank...19-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 Revenues FY2018 (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
    Last edited by Snoopy; 24-07-2020 at 10:35 PM.
    Industry shorthand sees BNZ employees still called 'bankers' but ANZ employees now called 'anchors'. Westpac has opted out of banking industry shorthand...

  10. #230
    Legend
    Join Date
    Jun 2004
    Location
    , , New Zealand.
    Posts
    6,993

    Default Unpicking the WBC Internal Wealth Managment Business BTFG (Part 3)

    Quote Originally Posted by Snoopy View Post
    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 Revenues FY2017 (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 Earnings FY2017 (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
    Last edited by Snoopy; 24-07-2020 at 10:34 PM. Reason: Work In Progress
    Industry shorthand sees BNZ employees still called 'bankers' but ANZ employees now called 'anchors'. Westpac has opted out of banking industry shorthand...

  11. #231
    Legend
    Join Date
    Jun 2004
    Location
    , , New Zealand.
    Posts
    6,993

    Default Unpicking the WBC Internal Wealth Managment Business BTFG (Part 4)

    Quote Originally Posted by Snoopy View Post

    Time to repeat this exercise for FY2017.

    Time to repeat this exercise for FY2019.

    Westpac Business Unit Revenues FY2019 (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 Earnings FY2019 (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
    Last edited by Snoopy; 30-07-2020 at 09:19 AM.
    Industry shorthand sees BNZ employees still called 'bankers' but ANZ employees now called 'anchors'. Westpac has opted out of banking industry shorthand...

  12. #232
    Member
    Join Date
    Mar 2020
    Location
    In the trough
    Posts
    409

    Default

    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)...

  13. #233
    Legend
    Join Date
    Jun 2004
    Location
    , , New Zealand.
    Posts
    6,993

    Default

    Quote Originally Posted by Cyclical View Post
    Wow, Snoopy, I really admire your dedication in picking all of this apart
    Thanks :-)

    Quote Originally Posted by Cyclical View Post
    and making some sense of it.
    Eeeerrrm. Not sure I have made any real progress with this bit :-(

    Quote Originally Posted by Cyclical View Post
    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.

    Quote Originally Posted by Cyclical View Post
    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
    Last edited by Snoopy; 30-07-2020 at 09:17 AM.
    Industry shorthand sees BNZ employees still called 'bankers' but ANZ employees now called 'anchors'. Westpac has opted out of banking industry shorthand...

  14. #234
    Legend
    Join Date
    Jun 2004
    Location
    , , New Zealand.
    Posts
    6,993

    Default Unpicking the WBC Internal Wealth Managment Business BTFG (Part 5)

    Quote Originally Posted by Snoopy View Post

    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 Revenues FY2018 (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/d...lth_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 Earnings Difference over FY2017 and FY2018 years
    Consumer Bank +9.0 to 9.4%
    Business Bank +27.5% to 28%
    BT Financial Group -100%
    Westpac Institutional Bank +0.35 to 0.65%
    Group Business Not Meaningful



    Changes in Westpac Revenue distribution following the death of BTFG business unit

    Westpac Business Unit Revenues Difference 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 Business Not 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/...urance-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
    Last edited by Snoopy; 30-07-2020 at 05:57 PM.
    Industry shorthand sees BNZ employees still called 'bankers' but ANZ employees now called 'anchors'. Westpac has opted out of banking industry shorthand...

  15. #235
    Legend
    Join Date
    Jun 2004
    Location
    , , New Zealand.
    Posts
    6,993

    Default Unpicking the WBC Internal Wealth Managment Business BTFG (Part 6)

    Quote Originally Posted by Snoopy View Post
    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.

    EOFY2015 EOFY2016 EOFY2017 EOFY2018 EOFY2019
    No. of Aligned & Salaried Financial Advice Planners at Westpac 1192 1134 1011 803 0

    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 $10.5m AR2017 p91, Note 1/ below
    FY2016 $498m $7m AR2018 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
    FY2019 Reallocated 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
    Last edited by Snoopy; 30-07-2020 at 05:56 PM.
    Industry shorthand sees BNZ employees still called 'bankers' but ANZ employees now called 'anchors'. Westpac has opted out of banking industry shorthand...

  16. #236
    Legend
    Join Date
    Jun 2004
    Location
    , , New Zealand.
    Posts
    6,993

    Default Normalised Earnings: Post 'Pendal' & 'Advice' Perspective

    Quote Originally Posted by Snoopy View Post

    Westpac Group (WBC) FY2016 FY2015 FY2014 FY2013 FY2012
    Normalized Profit {A} $7,605m $7,527m $7,338m $6,792m $6,328m
    Shares on Issue EOFY {B} 3,313m 3,140m 3,114m 3,087m 3,043m
    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:

    FY2019 FY2018 FY2017 FY2016 FY2015 Reference
    WBC declared 'Cash Profit' $6,849m $8,065m $8,062m $7,822m $7,820m AR2019 p158, AR2017 p136
    less Retrospective Bank Levy Adjustment (1) $0m $0m 0.7($373m-$95m) 0.7x($351m) 0.7x($331m) My post 153
    add 'Naughty Bank' Customer Remediation (2) $958m $281m $0m $0m $0m My post 139
    add Wealth Division Reset (2) $172m $0m $0m $0m $0m My post 139
    add Insurance Arm Adjustment (2) $58m $0m $0m $0m $0m My 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 saving 0.7x$20m 0.7x$20m 0.7x$20m 0.7x$20m 0.7x$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
    Last edited by Snoopy; 30-07-2020 at 09:34 PM.
    Industry shorthand sees BNZ employees still called 'bankers' but ANZ employees now called 'anchors'. Westpac has opted out of banking industry shorthand...

  17. #237
    Legend
    Join Date
    Jun 2004
    Location
    , , New Zealand.
    Posts
    6,993

    Default Buffett Test 2/ FY2019: Rising eps Trend (one setback allowed)

    Quote Originally Posted by Snoopy View Post
    Westpac Group (WBC) FY2016 FY2015 FY2014 FY2013 FY2012
    Normalized Profit {A} $7,605m $7,527m $7,338m $6,792m $6,328m
    Shares on Issue EOFY {B} 3,313m 3,140m 3,114m 3,087m 3,043m
    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) FY2019 FY2018 FY2017 FY2016 FY2015
    Normalized & Adjusted Profit {A} $8,124m $8,400m $7,854m $7,549m $7,544m
    Shares on Issue EOFY {B} 3,490m 3,435m 3,394m 3,346m 3,184m
    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
    Last edited by Snoopy; 02-08-2020 at 07:13 PM.
    Industry shorthand sees BNZ employees still called 'bankers' but ANZ employees now called 'anchors'. Westpac has opted out of banking industry shorthand...

  18. #238
    Legend
    Join Date
    Jun 2004
    Location
    , , New Zealand.
    Posts
    6,993

    Default An unorchestrated 'litigation lot' of liabilities: Part 6

    Quote Originally Posted by Snoopy View Post
    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-we...ng-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/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!

    SNOOPY
    Industry shorthand sees BNZ employees still called 'bankers' but ANZ employees now called 'anchors'. Westpac has opted out of banking industry shorthand...

  19. #239
    Legend
    Join Date
    Jun 2004
    Location
    , , New Zealand.
    Posts
    6,993

    Default Retrospectively adjusting the WBC asset base

    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 $812,156m 6.639%
    FY2016 $58,181m $839,202m 6.933%
    FY2017 $61,342m $851,875m 7.201%
    FY2018 $64,573m $815,019m 7.923%
    FY2019 $65,507m $841,119m 7.788%
    HY2020 $67.646m $967,662m 6.991%

    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
    Last edited by Snoopy; 03-08-2020 at 09:37 AM.
    Industry shorthand sees BNZ employees still called 'bankers' but ANZ employees now called 'anchors'. Westpac has opted out of banking industry shorthand...

  20. #240
    Legend
    Join Date
    Jun 2004
    Location
    , , New Zealand.
    Posts
    6,993

    Default Buffett Test 3/ FY2019: ROE > 15% (one setback allowed)

    Quote Originally Posted by Snoopy View Post

    Westpac Group (WBC) FY2016 FY2015 FY2014 FY2013 FY2012
    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) FY2019 FY2018 FY2017 FY2016 FY2015
    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
    Last edited by Snoopy; 02-08-2020 at 07:13 PM.
    Industry shorthand sees BNZ employees still called 'bankers' but ANZ employees now called 'anchors'. Westpac has opted out of banking industry shorthand...

Bookmarks

Posting Permissions

  • You may not post new threads
  • You may not post replies
  • You may not post attachments
  • You may not edit your posts
  •