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Thread: WBC - Westpac

  1. #231
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    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 08:19 AM.
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  2. #232
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    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)...

  3. #233
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    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 08:17 AM.
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  4. #234
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    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 04:57 PM.
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  5. #235
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    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 04:56 PM.
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  6. #236
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    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 08:34 PM.
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    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 06:13 PM.
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    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
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  9. #239
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    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 08:37 AM.
    Watch out for the most persistent and dangerous version of Covid-19: B.S.24/7

  10. #240
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    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 06:13 PM.
    Watch out for the most persistent and dangerous version of Covid-19: B.S.24/7

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