WBC - Westpac

[Scrunch]

	EOFY2018	EOFY2019	FY2019 Averaged	Reference
Corporate Bonds	$103,159m	$109,340m	$106,250m	(Senior Debt p198 AR2019)
Commercial Paper	$52,693m	$56,883m	$54,788m	(Repurchase Agreements p197, Covered Bonds, Securitization and Structured Entities p198 AR2019)
Certificates of Deposit	$38,731m	$41,534m	$40,133m	(Certificates of Deposit p195 AR2019}
Customer Deposits (Australia)			$437,887m	(Non-interest bearing, interest bearing at call, interest bearing term p196 AR2019}
Tier 2 Capital Instruments	$8,310m	$12,502m	$10,406m	(Total Tier 2 Loan Capital p200 AR2019)
Total			$649,464m

I guess SuncorP also elected not to follow.

[Snoopy]

I guess Suncorp also elected not to follow.

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

https://www.suncorpgroup.com.au/uplo...rch%202017.pdf

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

-----

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

-----

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

SNOOPY

[Snoopy]

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

See https://www.westpac.com.au/content/d...ncy_Report.pdf

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

Bank Levy Estimate Calculation for FY2017

	EOFY2016	EOFY2017	FY2017 Averaged	Reference
Corporate Bonds	$106,626m	$98,823m	$102,725m	(Senior Debt p165 AR2017)
Commercial Paper	$47,760m	$46,511m	$47,136m	(Repurchase Agreements p164, Covered Bonds, Securitization and Structured Entities p165 AR2017)
Certificates of Deposit	$46,463m	$46,921m	$46,692m	(Certificates of Deposit p163 AR2017}
Customer Deposits (Australia)			$415,591m	(Non-interest bearing, interest bearing at call, interest bearing term p164 AR2017}
Tier 2 Capital Instruments	$8,947m	$9,238m	$9,093m	(Total Tier 2 Loan Capital p166 AR2017)
Total			$621,237m

Bank Levy Estimate Calculation for FY2017

0.0006 x $621,237m = $373m

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

Note

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

Bank Levy Estimate Calculation for FY2016

	EOFY2015	EOFY2016	FY2016 Averaged	Reference
Corporate Bonds	$87,645m	$106,626m	$97,156m	(Senior Debt p160 AR2016)
Commercial Paper	$55,593m	$47,760m	$51,676m	(Repurchase Agreements p159, Covered Bonds, Securitization and Structured Entities p160 AR2016)
Certificates of Deposit	$48,184m	$46,463m	$46,692m	(Certificates of Deposit p158 AR2016}
Customer Deposits (Australia)			$380,682m	(Non-interest bearing, interest bearing at call, interest bearing term p159 AR2016}
Tier 2 Capital Instruments	$7,912m	$8,947m	$8,430m	(Total Tier 2 Loan Capital p161 AR2016)
Total			$585,248m

Bank Levy Estimate Calculation for FY2016

0.0006 x $585,248m = $351m




Bank Levy Estimate Calculation for FY2015

	EOFY2014	EOFY2015	FY2015 Averaged	Reference
Corporate Bonds	$82,377m	$87,645m	$85,011m	(Senior Debt p158 AR2015)
Commercial Paper	$55,303m	$55,933m	$55,628m	(Repurchase Agreements p157, Covered Bonds, Securitization and Structured Entities p158 AR2015)
Certificates of Deposit	$51,577m	$48,184m	$49,881m	(Certificates of Deposit p156 AR2015}
Customer Deposits (Australia)			$354,199m	(Non-interest bearing, interest bearing at call, interest bearing term p157 AR2015}
Tier 2 Capital Instruments	$6,376m	$7,912m	$7,104m	(Total Tier 2 Loan Capital p159 AR2015)
Total			$551,863m

Bank Levy Estimate Calculation for FY2015

0.0006 x $551,863m = $331m




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

SNOOPY

[Snoopy]

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

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

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

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

The business objectives are to support:

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

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

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

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

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

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

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

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

Westpac continues to claim they aspire :

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

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

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

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

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

SNOOPY

[Snoopy]

WBC
	Annual Net Impaired Asset Expense (A)	Total Impaired Loan and Credit Commitment Provision (B)	(A)/(B)	Total Loans (impairment (B) included) (C)	(B)/(C)	EBT (before impaired asset exposure) (D)	(A)/(D)
FY2008	$931m	$2,174m	43%	$315,719m	0.7%	$6,150m	15.1%
FY2009	$3,238m	$4,734m	68%	$468,193m	1.0%	$9,334m	34.7%
FY2010	$1,456m	$5,061m	26%	$482,716m	0.9%	$9,494m	15.3%
FY2011	$993m	$4,414m	22%	$501,023m	0.9%	$9,507m	10.4%
FY2012	$1,212m	$4,241m	29%	$518,686m	0.8%	$10,026m	12.0%
FY2013	$847m	$3,949m	21%	$540,113m	0.7%	$10,619m	8.0%
FY2014	$650m	$3,481m	19%	$583,824m	0.6%	$11,390m	5.7%
FY2015	$753m	$3,332m	23%	$626,648m	0.5%	$12,169m	6.2%
FY2016	$1,124m	$3,602m	31%	$665,528m	0.5%	$11,768m	9.6%
FY2017	$853m	$3,119m	27%	$688,038m	0.5%	$12,368m	6.9%
FY2018	$710m	$3,053m	23%	$712,733m	0.4%	$12,441m	5.7%
FY2019	$794m	$3,913m (*1)	20%	$718,683m	0.5%	$10.543m	7.5%

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

SNOOPY

[macduffy]

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

[Snoopy]

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

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

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

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

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

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

SNOOPY

[macduffy]

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

[Snoopy]

'The bank that may have facilitated pedophiles'

doesn't sound like a great marketing campaign line.

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

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

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

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

-----

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

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

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

-----

In house,

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

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

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

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

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

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

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

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

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

SNOOPY

[Snoopy]

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

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

Old System under AASB 139

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

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

New System under AASB 9

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

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

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

SNOOPY