Westpac – Page 14 – Digital Finance Analytics (DFA) Blog

Westpac pays $1 million following ASIC’s concerns about credit card limit increase practices

ASIC has announced that Westpac has improved its lending practices when providing credit card limit increases to customers. Westpac has also committed to a remediation program that includes proactive customer refunds, and a contribution of $1 million over four years to support financial counselling and literacy.

ASIC was concerned that Westpac failed to make reasonable inquiries about some consumers’ income and employment status before increasing their credit card limit. In particular, ASIC was concerned that Westpac, in relying largely on its automated processes, was not making reasonable inquiries of individual cardholders, which is not consistent with the responsible lending obligations under by the National Consumer Credit Protection Act 2009 (the National Credit Act).

Westpac has committed to a number of steps to address ASIC’s concerns including:

Changing its credit limit increase processes to ensure that, at a minimum, reasonable inquiries are made about a customer’s income and employment status to ascertain their financial situation before the limit is increased.
A remediation program involving a review of credit limit increases previously provided where a cardholder experiences financial difficulty, with consumer refunds paid where appropriate.
Engaging an independent external expert to provide assurance of the effectiveness of the remediation program.

Westpac will also make a $1 million payment to support financial counselling and financial literacy initiatives.

Michael Saadat, Senior Executive Leader of Deposit Takers, Credit and Insurers said, ‘Credit card issuers, like all consumer credit providers, have to meet obligations under responsible lending laws.’

‘ASIC maintains an ongoing focus on compliance with these laws. Where we see non-compliance, we will take action, including taking steps to ensure affected consumers are appropriately remediated.’

ASIC acknowledges the co-operation of Westpac in resolving this issue, including suspending its sending of credit limit increase invitations until ASIC’s concerns were resolved and Westpac’s processes improved.

Westpac FY15 Result Shows Growth Pressure Building

Westpac Group today announced statutory net profit for the 12 months to 30 September 2015 of $8,012 million, up 6% over the prior year. The Group benefited from some one-off items, stable NIM, but lower non-interest income whilst credit quality improved. The the real challenge is finding future growth, in an environment where mortgage lending growth is likely to slow.

There were a number of significant infrequent items that in aggregate increased net profit. These included the partial sale of the Group’s shareholding in BT Investment Management Limited (BTIM) which generated an after tax gain of $665 million, several tax recoveries of $121 million, partially offset by higher technology expenses of $354 million (post-tax) following changes to accounting for technology investment spending and derivative valuation methodologies changes which resulted in an $85 million (post-tax) charge.

Net interest income of $14,239 million was up 6%, with net interest margin unchanged. It increased $725 million or 5% compared to Full Year 2014, with total loan growth of 7% and customer deposit growth of 4%. Net interest margin was stable at 2.09%, with lower Treasury income, reduced asset spreads and higher liquidity costs offset by reduced cost of funds from both deposit products and wholesale funding.

There was an 8 basis points decrease from asset spreads. The primary driver was increased competition in mortgages, with business, institutional and unsecured lending spreads also lower, offset by a 10 basis points benefit from customer deposit impacts, mostly from improved spreads on term deposits and savings accounts. Treasury and Markets contribution to the Group net interest margin decreased 2 basis points reflecting lower returns from the management of the liquids portfolio and balance sheet management in Treasury.

Non-interest income increased $980 million or 15% compared to Full Year 2014 primarily due to the gain associated with the sale of BTIM shares ($1,036 million). Excluding this item, non-interest income reduced $56 million or 1%, from lower trading income and lower insurance income reflecting higher insurance claims predominantly associated with severe weather events. Fees and commissions decreased $14 million, or 1%. Growth in business lending line fees and institutional fees were offset by seasonally lower Australian credit card point redemption income and promotional credit card point awards related to the launch of the Westpac New Zealand Airpoints loyalty program.

Operating expenses increased $926 million or 11% compared to Full Year 2014. This included $505 million related to changes to accounting for technology investment spending. Excluding this item, operating expenses increased $421 million or 5% primarily due to higher investment related costs, including increased software amortisation and foreign currency translation impacts.

Cash earnings of $7,820 million, up 3%, and cash return on equity (ROE) of 15.8%, down 57 basis points. Australian retail and business banking has been the key driver of performance, with Westpac RBB increasing cash earnings by 8% and St. George up by 7%. The New Zealand division also reported a 6% increase in cash earnings (in NZ$).

The Board increased the final dividend by 1 cps to 94 cps (compared to the interim 2015 dividend). This takes the total dividends for the year to 187cps, up 3% and represents a payout ratio of 75% of cash earnings.

Asset quality improved over the year with stressed exposures to total committed exposures falling 25bps reducing from 1.24% to 0.99%, while impairment charges rose 16%, at 12 basis points or $103 million compared to Full Year 2014. Direct write-offs were also higher. Total impairment provisions were $3,332 million with individually assessed provisions of $669 million and collectively assessed provisions of $2,663 million.

In the consumer sector, unsecured consumer delinquencies trended higher over Full Year 2015 as unemployment increased. Group consumer unsecured 90+ day delinquencies increased 8 basis points since 30 September 2014, but have fallen 10 basis points since 31 March 2015 (typically delinquencies fall in the second half of the year). In New Zealand delinquencies reduced further in Second Half 2015 to be 20 basis points lower than at 30 September 2014.

Australian 90+ day mortgage delinquencies were at 0.45% at 30 September 2015, 2 basis points lower than 30 September 2014 and 31 March 2015, as the portfolio continues to be supported by a strong property market and falling interest rates. The investment property segment has a 90+ day delinquency rate of 0.31% which is lower than the portfolio average. Despite low delinquencies, the modest pace of economic growth and rising
unemployment has led to some increase in delinquencies in those states and regions closest to mining and where there has been a structural shift in manufacturing. This is being offset by robust conditions in NSW where economic activity has been stronger.

Australian properties in possession decreased by 8 over Second Half 2015 to 255. Realised mortgage losses were $70 million for Full Year 2015, equivalent to 2 basis points of Australian housing loan balances.

New Zealand mortgage 90+ day delinquencies improved 7 basis points since 30 September 2014 to 0.14% at 30 September 2015. The low level of delinquencies reflects the improving economy and the strong Auckland housing market.

Westpac first raised around $2.0 billion in capital at its First Half 2015 results by partially underwriting the DRP. Capital was further increased by $0.5 billion following the partial sale of shares in BTIM. These two actions added $2.5 billion to the Group’s capital base and contributed to lifting Westpac’s CET1 capital ratio at 30 September 2015 to 9.5%, above the Group’s preferred range of 8.75% – 9.25%.

Allowing for the approximately $3.5 billion of ordinary equity expected to be raised through its recent renounceable entitlement offer, Westpac will be well within the top quartile of banks globally with a CET1 ratio of over 14% on an internationally comparable measure.

Looking at the segmentals, Westpac RBB’s focus on service and having Australia’s leading mobile/online capability for customers helped deliver both core and cash earnings growth of 8%. Record customer growth of over 191,000 helped drive loan and deposit growth up 6% and 7% respectively.

St. George Banking Group’s brands, St. George, BankSA, Bank of Melbourne and RAMS contributed to the 7% increase in cash earnings, with core earnings rising 8%. The Bank of Melbourne opened its 100th branch during the year and was voted best regional bank in Australia for the second time2. Revenue increased 7% with net interest income up 7% due to 8% growth in lending and a 3% rise in deposits.

BT Financial Group continues to be the leading wealth provider in Australia, ranking number 1 on all Platforms, with Funds under Administration (FUA) share of 19.9%. BTFG delivered flat cash earnings over the year with the result impacted by the partial sale of BTIM, lower performance fees, and higher insurance claims.

Westpac Institutional Bank is the number one institutional banking franchise in Australia. Financial conditions have been challenging, with margins 15 basis points lower in line with global capital market conditions. This contributed to a 12% reduction in cash earnings to $1,286 million. The decline was also due to methodology changes to derivative valuations (which reduced revenue by $122 million) and a lower impairment benefit. The business continued to achieve good underlying growth, with lending up 12% and customer revenue up 2%.

Westpac New Zealand delivered another solid result with a 7% increase in core earnings and a 6% increase in cash earnings (9% and 8% respectively in A$). The result was supported by revenue growth of 7% and good balance sheet growth, with a 7% rise in lending and a 5% increase in deposits.

Following changes to the Group’s technology and digital strategy, rapid changes in technology and evolving regulatory requirements, a number of accounting changes have been introduced, including moving to an accelerated amortisation methodology for most existing assets with a useful life of greater than three years, writing off the capitalised cost of regulatory program assets where the regulatory requirements have changed, and directly expensing more project costs. The expense recognised this year to reduce the carrying value of impacted assets has been treated as a cash earnings adjustment given its size and that it does not reflect ongoing operations.

Westpac to refund premiums for unwanted insurance cover

ASIC says following an ASIC surveillance, Westpac will write to more than 10,600 insurance customers and will offer to refund any premiums paid for insurance cover they did not need. Westpac charged customers for loan protection insurance while the customer did not have a loan on foot and where the customer did not intend to be covered for that period.

Customers affected include those who took out a Mortgage Secure (MS) or Home Loan Protection (HLP) insurance policy when they applied for a home loan. These products were sold as consumer credit insurance (CCI) since 2002 and 2007 respectively, and were designed to provide a benefit in the event that the customer was not able to repay their home loan due to certain events occurring such as sickness or death.

An ASIC surveillance uncovered that Westpac may have been collecting premiums from some customers for a CCI policy over a period when the customer did not have a home loan. In particular, ASIC was concerned that Westpac had been collecting premiums for these products:

before a home loan was drawn down,
after a home loan was repaid, or
where a customer did not go ahead with a home loan.

ASIC Deputy Chair Peter Kell said, ‘It is important that a product is sold in a way that is consistent with what it is designed to do, in order to ensure that customers don’t pay for something they don’t need. In this case, Westpac customers may have been paying for insurance cover they did not need, either because it covered risks that were not present or risks against which they were already insured.’

Westpac Builds Capital Further; Lifts Mortgage Rates

In a move to bolster capital, and ahead of its full year results in November, Westpac has announced a $3.5bn share offer and lifts its mortgage rate for existing owner occupied and investor mortgage borrowers. The company is in a trading halt until 19th October. They claim this will place their CET1 capital ratio in the top quartile of banks globally on a comparable basis.

As we predicted, banks need to bolster their capital, and will raise mortgage rates independent of moves in the RBA cash rate. We expect further rises across the industry, making mortgages more expensive to existing borrowers. We also expect intense competition for new owner occupied business, so special offers will also continue.

Looking at the details, Westpac has announced a $3.5bn share offer, to raise approximately $3.5billion of ordinary equity. The price of the offer has been set at $25.50 which is a discount of 13.1%.

Westpac’s shares have been placed in a trading halt to enable the institutional component of the Entitlement Offer to be completed, with trading expected to recommence on 19 October 2015.

The equity raised will add approximately 100 basis points to Westpac’s Common equity tier 1 (“CET1”) capital ratio and places Westpac ’s CET1 capital ratio within the top quartile of banks globally, with a CET1 capital ratio of over 14% on an internationally comparable basis. Capital raised responds to changes in mortgage risk weights that will increase the amount of capital required to be held against mortgages by more than 50%, with the increased regulatory requirement to be applied from 1 July 2016.

Westpac has also announced an increase in its variable home loan (owner occupied) and residential investment property loan rates by 20 basis points. The new rates take effect from 20 November 2015. It had previously lifted rates on investment loans by 27 basis points in September.

To support the offer, Westpac also announced its unaudited preliminary Full Year 2015 Result. Highlights of the unaudited preliminary result for Full Year 2015 compared to Full Year 2014 include:

Statutory net profit of $8,012 million, up 6%
Cash earnings of $7,820 million, up 3%
Cash earnings per share of 249.5 cents, up 2%
Cash return on equity of 15.8%, down 57 basis points

Westpac also expects to determine a 2015 final, fully franked dividend of 94 cents per share, up 2 cents on the 2014 Final Dividend. New shares issued under the Entitlement Offer are not entitled to the 2015 Final Dividend.

Westpac Seeks To Build, Leverages Digital

In today’s market update, we got a glimpse of the banks intentions under CEO Brian Hartzer. They are looking to add more than 1 million new customers (2015-17), and increase the number of products per customer. There is a strong focus on digital transformation, including the development of a customer service hub which links multiple systems to create a single view of a customer; as well more revamped branches, with 55% of the network changed by 2018. The aim is to drive the expense to income ratio below 40% within 3 years, reducing the groups expense growth run-rate to 2-3% per annum.

They plan to lift investment by $200m to $1.1 billion which is directed to growth, service and efficiency initiatives, focussing on digital, simplification and customer service.

They reaffirmed a target ROE of more than 15%.

Nothing wrong with in intent, but the question will be excellence of execution.

No further disclosure on current banking performance. We think a close eye on the performance of the investment mortgage book is warranted given current market dynamics.

Westpac To Stop Facilities For Payday Lenders

Westpac has today written to some of its Payday customers and have informed them that the bank has taken the decision to cease to provide banking and financial products and services to its customers who provide Short Term Credit Contracts (STCCs) or Small Amount Credit Contracts (SACCs) under section 5(1) of the National Consumer Credit Protection Act 2009 (cth).

According to a release from Cash Converters, the Company currently has a securitisation facility with Westpac drawn to $59m which is contracted to March 2016 with an approximate six month run-off period. Westpac also provides transactional banking services to the Company and have agreed to provide these services until the expiry date of the securitisation facility.

In a parallel announcement, Money3 Corporation Limited (‘Money3’) also received notice from Westpac of their intent to cease their banking relationship. The Westpac securitisation facility accessed by Money3 to fund the automotive business is currently drawn to approximately $10 million and Money3 says it has the capacity to repay the facility from existing cash flows. The existing facility has a 12 month run off period after December 2015. In addition to the $10million Westpac facility Money3 has in place a $30 million corporate bond facility that is unaffected by Westpac’s decision.

Westpac was the only major lender providing funding to the Payday sector and had been criticised for this by a number of stakeholders.

Westpac Follows The Herd On Mortgage Repricing

Westpac today announced an increase in interest rates for residential investment property loans, following the introduction of investor lending growth benchmarks set by APRA. They will lift the rates 27 basis points for Westpac brands, and 25 bps for the brands which sit under the St George umbrella, but sooner (21 August), versus 25 September for Westpac.

The standard variable interest rate on Westpac residential investment property loans for new customers will increase by 0.27% to 5.75%, effective 10 August 2015. For existing customers the increase will be effective 25 September, 2015. This timing is to ensure that there is a smooth transition to the differentiated rates structure for the mortgage portfolio.

Fixed rates on residential investment property loans will increase by up to 0.30%, effective 4 August 2015.

Westpac will decrease fixed rates on owner occupier home loans by up to 0.30% effective 4 August 2015.

Consumer Bank Chief Executive, George Frazis, said: “Today’s announcement is an important step in ensuring that Westpac meets APRA’s benchmark that investor credit growth should be no more than 10 per cent.

“We have already introduced a range of initiatives, including increasing the deposit required for investment property loans to 20 per cent as part of our commitment in meeting APRA’s benchmark.

“However, we are pleased to be able to reduce fixed rates on owner occupier loans. We know that the dream of many Australians is to get into their own home and the new lower fixed rates will benefit customers that are looking for security and peace of mind about their loans and monthly repayments.”

The Westpac delay is probably connected with the system changes which will need to be made, as we highlighted in an earlier post.

Do Systems Limitations Hamper Mortgage Repricing?

Westpac, the bank with the largest share of Investment Home Loans will be the last of the big four to tweak their rates, following recent changes at NAB, ANZ and CBA. However, systems limitations may cramp their style according to reports today.

According to SMH Business Day,

“Westpac Banking Corp is missing out on $1 million a day that its competitors are now creaming from landlords because its computer systems will not allow it to charge differing interest rates.

Westpac, which is the largest lender to landlords, is the only one of the big four banks not to have increased interest rates for property investors in recent days.

National Australia Bank on Monday said it would raise rates by 0.29 percentage points on all interest-only loans following Commonwealth Bank of Australia and ANZ Banking Group, which last week raised rates for investors only.

Sources said NAB is constrained from charging different rates to investors and owner-occupiers because of technical problems. The bank declined to comment.

Westpac too is finding it challenging to distinguish between investors and owner-occupiers, sources said.

Westpac and NAB use a single “reference rate” for owner-occupier and investor borrowers, which means they cannot increase the standard variable rate for property investors without also hitting owner-occupiers.
Banking sources said it might take Westpac several months to work through systems issues to enable it to charge different rates. This could involve senior members of the IT team re-coding some of the banking systems to allow different reference rates even though the bank has created different home loan products for investors and owner-occupiers.

The pressure on Westpac to resolve its systems issues to enable it to charge different rates is growing because senior bankers tip a bifurcation of the home loan interest rate market, with owner-occupiers and investors expected to pay different rates in coming years.

Up to 1998, it was common for banks to offer owner-occupiers lower interest rates compared to property investors. The interest rate differential was around 1 percentage point”.

Westpac Takes an Interest in Bitcoin Startup

The Reinventure Group, an Australian-based VC firm focused on fintech, has made a strategic investment in Coinbase. Founded in June of 2012 in San Francisco, California, Coinbase is a bitcoin wallet and platform where merchants and consumers can transact with the new digital currency bitcoin. With a mission to make payments more open and efficient for the world, Coinbase enables the secure purchase and use of bitcoin for more than 2.3 million users internationally, has signed more than 40 thousand merchants and has 7000 developers that have built on its Toshi API platform. Reinventure co-invested alongside Union Square Ventures, Andreessen Horowitz, Ribbit Capital and DFJ Growth as well as the New York Stock Exchange and investing arms of leading bank innovators, BBVA and USAA.

One of Reinventure’s primary objectives is to create opportunities between its portfolio companies and Westpac, Reinventure’s largest investor. They plan to work closely with Reinventure and share insights into the use of digital currencies globally.

Westpac is keen to understand emerging trends, acquire know-how from great entrepreneurs and co-create in areas that can benefit from the complementary skill-sets both parties bring. The Reinventure Fund is operated independently by the managers, Danny Gilligan and Simon Cant, who are also co-investors in the fund. With $50M in committed funds, they have invested in a number of opportunities, including SocietyOne, Nabo, Zetaris and PromisePay.

Westpac To Reduce BT Holding

Westpac today announced the intention to sell part of its shareholding in BT Investment Management (BTIM). DFA comments this is in part a move ahead of the tighter capital requirements which are in train and it is likely we will see other divestments across the industry as the screws are tightened.

The Westpac Group’s holding will reduce from its current 59% of BTIM’s issued capital to between 31% and 40%.

The sell-down will generate a post-tax accounting gain on sale of between $0.6 and $0.7 billion for Westpac. Westpac’s common equity Tier one capital ratio is also estimated to increase by between 10 and 15 basis points. The accounting gain will be treated as a cash earnings adjustment in Westpac’s full year 2015 accounts.

Westpac Group Chief Financial Officer, Peter King, said the transaction delivers benefits to both Westpac and BTIM.

“The sale allows the Group to realise a part of the investment in BTIM, increasing our capital ratios, while still maintaining a significant interest in BTIM.

“The strength and importance of the relationship remains unchanged. Wealth remains a strategically important focus for the Westpac Group and our continued investment in BTIM sees us maintain a stake in asset management which is a key factor in having a strong and diversified wealth business.”

Mr King said the sale is also important for BTIM shareholders.

“The transaction increases the proportion of BTIM’s shares that are readily tradable, improving liquidity and helping facilitate inclusion in key equity indices,” he said.

Westpac currently intends to retain a shareholding between 31% and 40%, with the CEO of BT Financial Group, Brad Cooper, remaining as a Non-Executive Director on the BTIM Board.