Releasing its full-year results for FY20 on Monday (2 November), the major bank CEO Peter King revealed that the major bank had seen a 66 per cent drop in statutory net profit.
For the financial year 2020, profits fell from $6.80 billion to $2.29 billion.
Cash earnings were down 62 per cent to $2.60 billion.
The result was “significantly affected” by issues stemming from COVID-19, including higher impairment charges and lower income due to low interest rates and fee waivers.
Nearly half of the drop is due to the record-breaking agreement with the Australian Transaction Reports and Analysis Centre (AUSTRAC) to settle civil proceedings launched in the Federal Court of Australia on 20 November 2019 for $1.3 billion.
“2020 has been a particularly challenging year and our financial result is disappointing,” said Mr King.
“Our earnings have been significantly impacted by higher impairment charges, increased notable items and the sharp decline in economic activity. At the same time, we have incurred higher expenses due to increased resourcing to handle unprecedented COVID-19 demands and fixing our compliance issues.”
He continued: “Excluding notable items, expenses were up 6 per cent this year. This reflected our focus on fixing risk and compliance issues and responding to COVID-19, which involved higher call and processing centre volumes, returning activities to Australia and increased employee and customer safety measures. The increase in expenses was partly offset by productivity savings of more than $400 million.”
Mr King also noted the AUSTRAC case, outlining that Westpac has made $280 million in payments to customers as part of its customer remediation program this year.
“We have taken accountability for our mistakes and commenced a process of fundamental change, which has included refreshing the board and management and elevating oversight of financial crime, compliance and conduct,” he said.
“We have started a comprehensive, multi-year program to strengthen our risk culture and how we manage risk across the group. This includes a significant investment in training, through our Customer Outcomes and Risk Excellence program, to support our people to speak up and respond quickly to emerging risks.
“We are also focused on reducing customer pain points, completing customer remediation as quickly as possible and reducing IT complexity. While we have made progress in these areas, there is more to be done.”
The CEO also outlined that the bank will be “moving back to core banking with a sharper focus on Australia and New Zealand”.
“We have enhanced our operating model to align our businesses to our major customer offerings, such as mortgages, everyday banking and business lending. This new model will improve decision making and accountability, with one individual now responsible for the financial performance, risk management and customer outcomes for each line of business.”
Westpac has confirmed that it is continuing work on its Customer Service Hub (CSH) program that aims to provide a “major improvement in functionality and productivity and create a better experience for both customers and bankers”.
The bank outlined that while the system went live for mortgages last year and rollout to finance managers was completed this year, it will commence work to enable broker home loans applications to be originated through CSH in 2021.
Mortgage book contracts
Mr King acknowledged that the bank had been impacted early on in the year with delays to loan processing and increased wait times due to COVID-19.
“While there were a few issues through the year, such as increased wait times and delays to loan processing, we have – and will continue to – support customers through this uncertain time,” he said.
“We are addressing the issues that have impacted performance in our mortgage book and expect to see improvement start to flow in 2021,” Mr King said.
“The simplification of our business will support improved returns and help pave the way for a reset of our cost base,” he added.
The results show that Westpac’s total mortgages portfolio (gross loans) contracted from $449 billion in September 2019 to $441 billion in September 2020.
Owner-occupiers now account for around 70 per cent of Westpac’s mortgages in Australia.
On an annualised basis, investor loans were 7 per cent down, while owner-occupier loans were 2 per cent up.
Fixed rate loans accounted for 30 per cent of the flow, down from 36 per cent on the prior comparative period.
As at September 2020, 76 per cent of Westpac’s mortgages were for principal and interest loans.
Over the financial year, Westpac provided COVID-19 deferral support to 175,000 mortgages and 40,000 businesses in Australia and New Zealand. These totalled $64.8 billion.
As at September 2020, this had dropped to $17.6 billion, comprising 41,000 mortgage accounts (totalling $16.6 billion) and 4,300 business customers (with $1 billion of loans).
More than two-thirds of customers had begun making repayments again, the CEO noted.
“We are continuing to assist customers affected by COVID-19. It has been pleasing to see a reduction in the number of our customers on loan deferral packages. More than two-thirds of Westpac’s mortgage customers who deferred repayments have now recommenced repayments.
“We do recognise, though, that for some customers the pandemic will have a longer-term effect on their circumstances, and we are committed to supporting them as much as possible,” he said.
The CEO continued: “For customers, we have provided certain special interest rates, fee waivers and temporary loans, while supporting around 215,000 consumer and business customers across Australia and New Zealand with repayment deferrals.”
Mr King and the other group executives will receive no short-term incentives this year, while no long-term incentives vested as performance hurdles were not met.
The major bank has said that it will pay out a final dividend of 31¢ a share, fully franked. The dividend represents a 49 per cent payout of the full year statutory result – the maximum dividend Westpac could pay under current APRA guidance.
Mr King concluded: “We remain in an uncertain economic environment; however, the recent budget has provided significant stimulus to businesses and households. Our economists expect at least half the personal tax cuts will be spent and businesses will respond to the generous depreciation allowances.”
Mr King said that despite the tough operating environment, Westpac remained well capitalised with a strong balance sheet and ample liquidity to continue to support its customers.
“Importantly, while economic conditions will still be challenging, Westpac is well placed to continue to support customers through this difficult time.
“With our three priorities of fix, simplify and perform, we are becoming a simpler and stronger bank with a renewed focus on a culture to execute and improve performance,” Mr King said.
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Annie Kane is the editor of The Adviser and Mortgage Business.
As well as writing about the Australian broking industry, the mortgage market, financial regulation, fintechs and the wider lending landscape – Annie is also the host of the Elite Broker and In Focus podcasts and The Adviser Live webcasts.