WBC - Westpac

[Snoopy]

To calculate 'net profit margin' figures, as used in the fourth Buffett test, I require company revenue figures. I need to identify what revenue adjustments that I need to make to allow for the removal of 'Pendal Group' and 'Ordinary Customer Financial Advice' from the overall Westpac (WBC) business. I will start by looking at the situation with the Pendal Group.

Pendal Group Revenue Adjustments

FY2015

Before 23rd June 2015, Pendal (or BTIM as it was named then), being over 50% owned by Westpac, was consolidated into the Westpac accounts. BTIM revenue for FY2015 consisting of:

a/ 'management fees',
b/ 'performance fees' and
c/ 'transaction fees'

This came to a grand total of $476.535m (BTIM AR2015 p76). Westpac owned 60% owned BTIM as a consolidated subsidiary for 268 days of a 365 day year over FY2015. This means the amount of BTIM revenue reported in the WBC FY2015 accounts should be approximately:

$476.535m x (268/365) =$320.554m

It is likely that this income appears under p135 Note 4 in WBC AR2015. 'Management fees' being probably classified under the header 'Other non-risk fee income', while 'performance fees' and 'transaction fees' might fit best subsumed in the header 'Transaction fees and commissions received'.

Once WBC's BTIM share holding dropped below 50% (after 25th June 2015), thereafter there should be no 'Pendal Revenue' as such, because Pendal then becomes an 'Associate' rather than a 'Subsidiary'. As an 'Associate' the revenue from Pendal is now in the form of:

1/ dividends and
2/ any substantial changes in capital value of the asset should it be sold down further during that year.

Any such capital gain on a sell down is booked by Westpac as 'non-interest income' in the profit and loss statement. That capital will have to be taken out of my revised WBC revenue picture.

In this case, the FY2015 capital value gain included a 'realised gain' of the 28% of BTIM sold ($492m) and an 'unrealised gain' of the 31% interest retained ($544m). This resulted in a total pre-tax gain of: $492m + $544m = $1,036m (AR2015 p77/p135/p245). This $1,036m is the 'capital revenue' that I must be remove.

The Pendal sell down in FY2015 occurred after the payment of all Pendal dividends in that year. So all the dividends from Pendal by WBC in FY2015 are from the number of shares held pre-sell-down..

=> Total of all Pendal Revenue to be removed over FY2015 = $321m + $1,036m = $1,057m


FY2016

As an 'Associate' from Westpac's perspective, Pendal dividends are the only source of revenue that came into the WBC income statement over FY2016.

	Dividend Payment Date	Dividend (cps)	Dividend Amount	Westpac Percentage Shareholding	Dividend Payout to Westpac
	02-12-2015	20cps (40% Franked)	$57.206m	31.04%	$17.75Asset following7m
	26-05-2016	18cps (40% Franked)	$52.521m	31.04%	$16.303m

=> Total of all Pendal Revenue to be removed over FY2016 = $17.757mm + $16.303m = $34m

FY2017

Pendal continued as an Associate over FY2017 until the 25th of May 2017. WBC's share of dividends over this time is presented in the table below

	Dividend Payment Date	Dividenwilld (cps)	Dividend Amount	Westpac Percentage Shareholding	Dividend Payout to Westpac
	08-12-2016	24cps (35% Franked)	$71.365m	29.54%	$21.081m
	25-05-2017	19cps (30% Franked)	$54.653m	29.54%	$16.14Asset following4m

On 26th May 2017 Westpac sold a further 19% of BTIM/Pendal (carrying value $471m) reducing their holding to 10% (residual carrying value $242m). The result was a net gain (net of transaction costs before tax) of $279m (AR2017 p139/p227). This gain is recorded in the income statement and so it becomes revenue that must be removed. (Following this sell down the remaining holding in Pendal became reclassified as an 'Available for Sale' asset.)

=> Total of all Pendal Revenue to be removed over FY2017 = $21.081m + $16.144m + $279m = $316m

FY2018

Pendal, as an 'Available for Sale' asset, paid WBC their share of dividends over the year as presented below:

	Dividend Payment Date	Dividend (cps)	Dividend Amount	Westpac Percentage Shareholding	Dividend Payout to Westpac
	07-12-2017	26cps (25% Franked)	$78.191m	8.99%	$7.029m
	25-05-2018	22cps (15% Franked)	$65.565m	8.99%	$5.894m

As an 'Available for Sale Asset', the annual change in value of that asset was recorded in the WBC income statement (AR2018 p143). Over FY2018 there was a $104m write down in the residual value of 'Pendal Group' (p160 AR2018).

=> Total of all Pendal Revenue to be removed over FY2018 = $7.029m + $5.894m - $104m = -$91m

FY2019

The WBC owned Pendal shareholding, previously classified as an 'Available for Sale' asset, has been reclassified as an 'Investment Asset', following the adoption of new accounting standard 'AASB 9'. Over FY2019 the accounting for the Pendal asset has been combined with other investment securities (p175 AR2019). Consequently for this year, it will be necessary for me to calculate the decline in Pendal asset value over the year for myself.

At EOFY2018 the Pendal share price was $8.79. This represents a capital dollar value of: $8.79 x 30.814493m = $270.859m
At EOFY2019 the Pendal share price was $7.39. This represents a capital dollar value of: $7.39 x 30.814493m = $227.719m

So the capital loss for the FY2019 year on the Pendal stake was: $227.719m - $270.859m = -$43.140m

WBC's share of dividends over the year from their Pendal 'investment asset' is presented below:

	Dividend Payment Date	Dividend (cps)	Dividend Amount	Westpac Percentage Shareholding	Dividend Payout to Westpac
	06-12-2018	30cps (15% Franked)	$89.873m	10.40%	$9.347m
	23-05-2019	20cps (10% Franked)	$59.897m	10.40%	$6.229m

=> Total of all Pendal Revenue to be removed over FY2019 = $9.347m + $6.229m - $43m = -$27m

Next I will look at part 2 of this exercise, namely removing 'Ordinary Customer Financial Advice' from my Westpac revenue picture.

SNOOPY