Tag: Westpac

Fitch Ratings downgrades Westpac, ANZ outlook

Credit rating agency Fitch Ratings has changed its outlook on Westpac and ANZ from “stable” to “negative”, following APRA’s update of its capital requirements for the major banks. Via InvestorDaily.

While the additional operational capital requirements should remain manageable for the banks, Fitch said the main driver for the changes were driven by a concern for governance and culture in the institutions. 

Westpac recently released its self-assessment on governance, accountability and culture, admitting significant shortcomings. 

The big four evaluated themselves last year when APRA chair Wayne Byres wrote to the country’s banks, insurers and super licensees after the CBA prudential inquiry. He asked them to determine whether weaknesses uncovered at CBA existed in their companies. 

The result of the self-assessments led APRA last week to increase the minimum capital requirements by $500 million and prompted Westpac to release publicly its self-assessment. 

ANZ is the only bank of the big four which has yet to publish its self-assessment.

“The additional capital requirements should remain manageable and not impair the bank’s ability to meet APRA’s ‘unquestionably strong’ targets starting in 2020, but it indicates material shortcomings in operational risk management, which were not aligned to what Fitch had previously incorporated into its ratings,” Fitch said in its update on Westpac. 

“This has resulted in a downward revision to our score for management and strategy and weaker outlook on earnings and profitability.” 

The rating agency made a similar note on ANZ, saying APRA’s findings indicated deficiencies within both companies’ management of operational and compliance risks, culture and governance.

However, Westpac said Fitch’s affirmation of its rating at AA- meant despite the challenges the bank faces, the credit agency expects it to “maintain its strong company profile in the short term, which in turn supports its strong financial profile.”

Likewise, ANZ was reaffirmed at AA- for both its banking group and New Zealand company. Fitch stated the group “continues to have robust risk and reporting controls around other risks, including credit, market and liquidity risk, as reflected by its conservative underwriting standards and very high degree of asset quality stability.”

Separately, on 9 July S&P Global Ratings affirmed the AA- long-term and A-1+ short-term issuer credit ratings and revised its outlook on the major Australian banks to “stable” from “negative.”

Westpac commented: “This outlook change reflects S&P’s view that the Australian government remains highly supportive of Australia’s systemically important banks based on APRA’s release on loss absorbing capacity.”

APRA applies additional capital requirements to ANZ, NAB and Westpac

The Australian Prudential Regulation Authority (APRA) is applying additional capital requirements to three major banks to reflect higher operational risk identified in their risk governance self-assessments.

APRA has written to ANZ, National Australia Bank (NAB) and Westpac advising of an increase in their minimum capital requirements of $500 million each. The capital add-ons will apply until the banks have completed their planned remediation to strengthen risk management, and closed gaps identified in their self-assessments.

The increase in capital requirements follows APRA’s decision in May last year to apply a $1 billion dollar capital add-on to Commonwealth Bank of Australia (CBA) in response to the findings of the APRA-initiated Prudential Inquiry into CBA.

Following the CBA Inquiry’s Final Report, APRA wrote to the boards of 36 of the country’s largest banks, insurers and superannuation licensees asking them to gauge whether the weaknesses uncovered by the Inquiry also existed in their own companies. Although the self-assessments raised no concerns about financial soundness, they confirmed that many of the issues identified in the Inquiry were not unique to CBA. This included the need to strengthen non-financial risk management, ensure accountabilities are clear, cascaded and enforced, address long-standing weaknesses and enhance risk culture.

APRA Chair Wayne Byres said: “Australia’s major banks are well-capitalised and financially sound, but improvements in the management of non-financial risks are needed. This will require a real focus on the root causes of the issues that have been identified, including complexity, unclear accountabilities, weak incentives and cultures that have been too accepting of long-standing gaps.

“The major banks play a vital role in the stability of the entire financial system, and APRA expects them to hold themselves to the highest standards of risk governance. Their self-assessments reveal that they have fallen short in a number of areas, and APRA is therefore raising their regulatory capital requirements until weaknesses have been fully remediated,” Mr Byres said.

APRA supervisors continue to provide tailored feedback to other banks, insurers and superannuation licensees that provided self-assessments to APRA. Where weaknesses have been identified, the level of supervisory scrutiny is being increased as remediation actions are implemented. Where material weaknesses exist, APRA is also considering the need for the application of an additional operational risk capital requirement.

Westpac Confirms Abuse of New Payments Platform PayID

Westpac has confirmed that the bank “detected mis-use” of the New Payments Platform’s PayID feature and “took additional preventative actions which did not include a system shutdown.” Via Computerworld.

Fairfax Media yesterday revealed details of the incident, citing a confidential Westpac memo that said around 60,000 NPP PayID lookups were made from seven compromised Westpac Live accounts. Around 98,000 “successfully resolved to a short name and this was displayed to the fraudster,” the memo said, according to Fairfax.

“No customer bank account numbers were compromised as a result,” a spokesperson for the bank told Computerworld in a statement. “Westpac Group takes the protection of customer data and privacy extremely seriously.”

The NPP was launched in February 2018. The platform enables real-time transfers between banks as well as a number of other features including data-enriched transactions. As of February this year, more than 75 financial institutions supported system, with 52 million account holders able to make payments via the NPP, according to NPP Australia, which maintains the platform.

PayID is the platform’s addressing service. It allows payments to be directed using an alternative identifier, such as an email address, ABN or phone number, rather than using a BSB and account number.

“NPP Australia has firm regulations in place that require participating financial institutions to monitor, detect and shut down any attempts to harvest data from PayID,” an  NPP Australia spokesperson said. “NPP Australia is working closely with Westpac on this matter.”

“No financial details or credentials are available from the PayID database, and therefore none of these details have been compromised,” the spokesperson said. “The only details obtained have been the account name which was designed to be returned to a legitimate enquiry.”

A PayID can’t be used to withdraw funds and “on its own cannot be used to create a false identity,” the spokesperson said.

“While this incident was unacceptable, the information obtained would be readily available in other public places,” the spokesperson said. “All participating financial institutions are on notice and may apply additional security controls if deemed necessary.”

“PayID was designed to provide more reassurance during the payments process; it enables a payer to see the name associated with a PayID to reduce the risk of a mistaken payments or scam,” the spokesperson said.

Westpac Drops Profit 24%

Westpac released their 1H19 results today and declared a statutory net profit of $3,173 million, down 24%. It would have been worse, but for lower than expected provisioning at $0.33 billion. Revenue was weaker than expected as they were hit by slower mortgage lending and weaker treasury. Margin is under pressure, but customer remediation costs continue to rise.

Cash earnings were $3,296 million, down 22% and cash earnings per share at 95.8 cents was down 23%.

Market and Treasury Income was down 5% this half excluding derivative valuation adjustments.

Non-interest income was down 30%, or 12% excluding major items (including provisions for estimated customer refunds, payments and associated costs, along with restructuring costs associated with resetting the Group’s wealth strategy).

They claim there was a focus on expense management, though overall expenses were 1% higher.

Cash earnings, excluding major remediation and restructuring items of $753 million (after tax), was down 5%.

Westpac has provisioned $1,445 million pre-tax in total over the past three years to work on its customer remediation programs, including $1,249 million for customer refunds. $896 million pre-tax in provisions were made this half ($617 million post-tax). They have more than 400 employees working directly on remediation projects and over the past 18 months, they have repaid around $200 million to customers.

The bank’s net interest margin (excluding Treasury & Markets) was down 12 basis points from 1H18 due to provisions for customer refunds and higher short-term funding costs. There was also a 4bps decrease in Treasury & Markets primarily from Treasury interest rate risk management.

There was a rise in 90 day plus past due and impaired, with stressed exposures rising from 1.08% to 1.10% from the previous half.

Total impairment provisions fell slightly from Oct 18, despite individually assesses provisions slightly higher. The economic overlay was weirdly reduced (despite the weaker economy!).

Mortgage delinquency in Australia continued to rise (as expected), with 482 properties in possession, compared with 396 last time (most were in WA or QLD). Past Due 90 days rose in most states, but WA lifted the most, and continues to reflect the weaker conditions in the west. They also called out rising delinquencies in NSW, a rise in P&I loans and longer cure times, together with the RAMs portfolio which has a higher delinquency profile. Total losses are at 2 basis points, which is low.

There was a rise in 100%+ LVR’s but is a small proportion of total book, based on data from Australian Property Monitor (but date not disclosed).

They have tightened lending standards significantly, and 62% of the portfolio were originated after the tightening. However, 19% of loans date from 2012-2014 and there are higher risks here.

90+ day delinquencies were 75 basis points for interest only loans, compared to Principal and interest rates were 83 basis points.

They made much of the better quality of new mortgage lending, but this begs the question about the back book in our view.

The banks return on equity (ROE) was 10.4%, and down 3.5 percentage points or excluding major remediation and restructuring items was, 12.8%.

They declared an interim fully franked dividend of 94 cents per share, which is unchanged

Their common equity Tier 1 capital ratio (CET1) of 10.64% is above APRA’s unquestionably strong benchmark

They foresee ongoing weakness in the Australian economy with subdued GDP growth this year expected to hold at around 2.2%. Consumers were being more cautious in the face of flat wages growth and a continuing soft housing market. They expect system credit growth to moderate, with pressure on margins to continue. But they expect credit quality to remain in good shape.

Westpac Reveals $357m Profit Hit Over Advice Fees

Westpac has provided an update on accounting provisions for remediation associated with authorised representatives in relation to certain ongoing advice service fees.

This follows the group’s 25 March 2019 ASX announcement on remediation provisions, where it announced an increase in provisions for its salaried planners and indicated that assessments were underway in relation to authorised representatives. Authorised representatives are advisers who maintain direct relationships with their customers for financial planning services, while operating under the Magnitude and Securitor advice licenses.

Westpac said these advisers received ongoing advice service fees from their customers of approximately $966 million between 2008 and 2018. Based on the information currently available, Westpac today said that its cash earnings in First Half 2019 will be reduced by $357 million for accounting provisions associated with this matter. 

The $510 million provision (pre-tax) is based on a range of accounting assumptions relating to potential payments of $297 million (pre-tax), interest costs of $138 million (pre-tax) and $75 million (pre-tax) in remediation program costs. 

That part of the current estimated provision which relates to potential payments represents around 31 per cent of the ongoing advice service fees collected over the period which compares to 28 per cent estimated for salaried planners. 

Westpac said it will continue to work with current and prior authorised representatives and their customers to determine where a payment should be provided. The final cost of remediation will not be known until all relevant information is available and payments have been made. The bank is yet to finalise its remediation approach, which may change following industry and regulator discussions. 

“While it is disappointing that we have needed to make these provisions, I said at the end of last year that our priority was to deal with any outstanding issues and process payments as quickly as possible,” Westpac CEO Mr Brian Hartzer said. 

“As part of our ‘get it right put it right’ initiative we are fixing issues and are determined to ensure that they don’t reoccur.”

Trade Surplus Climbs to $4.8bn, a Record High

This is all about the Iron Ore price, thanks to Brazil. Fortunate yes, planned no!

The ABS reported that

  • In trend terms, the balance on goods and services was a surplus of $4,348m in February 2019, an increase of $395m on the surplus in January 2019.
  • In seasonally adjusted terms, the balance on goods and services was a surplus of $4,801m in February 2019, an increase of $450m on the surplus in January 2019.

This from Westpac.

The trade surplus rose to $4.8bn in February, up from a revised $4.35bn.

That exceeded expectations (market median $3.7bn and Westpac $3.8bn).

Exports: exceeded expectations, +0.2% vs a forecast -0.9%. The key surprise, the expected pull-back in gold failed to materialise.

Imports: were softer than anticipated, -1.1% vs a forecast +1.1%

Additional detail

Export earnings have been boosted by higher commodity prices, particularly for coal and iron ore. In February, metal ore export earnings (including iron ore) jumped by $1.0bn to $9.6bn, a record high – as anticipated. The spot iron ore price soared to US$85/t in the month as global supply was dented by the tailings dam tragedy in Brazil. Coal exports fell sharply, down $0.8bn on weaker volumes. Gold exports, up $1.4bn in January, held at high levels in February, down only $140mn.

Comments

The trade balance has strengthened from a $2.9bn surplus on average in the December quarter to a $4.6bn on average surplus in the March quarter. The bulk of this improvement likely reflects higher commodity prices. The lift in prices is boosting Australia’s national income, which is flowing through to higher tax revenues – providing governments with additional fiscal flexibility, as evident in recent budget updates. However, despite this, wages growth remains sluggish.

Westpac Takes A Profit Hit On Remediation

Westpac says its cash earnings in first half 2019 have been reduced by an estimated $260m due to its customer remediation programs.

Cash earnings of customer remediation provisions for the full year of 2017 and the full year of 2018 were $118m and $281m respectively, so the newly released figure shows a sharp increase.

The key remediation items include:

• Customer refunds associated with certain ongoing advice service fees charged by the group’s salaried financial planners

• Refunds for certain consumer and business customers that had interest only loans that did not automatically switch to principal and interest loans when required

Westpac CEO Brian Hartzer said, “As part of our ‘get it right put it right’ initiative we are determined to fix these issues and stop these errors occurring again. We will continue to review our products and services to ensure they deliver the right outcomes for customers, and if necessary, make further provisions.”

Westpac will commence remediation in the group’s second half 2019 for customers of authorised representatives still operating under BT Financial Group’s licences.

Work is also underway to determine the extent of the services provided by authorised representatives who are no longer operating under BTFG’s licences, including those who have left the industry.

According to a statement from the bank, this remediation program is more challenging, because many of the authorised representatives’ files have been difficult to access.

Westpac said:

• Total fees received by authorised representatives in 2008 to 2018 were approximately $966m

• Within this total, fees received from customers by authorised representatives still operating under BTFG’s licences in the period 2008 to 2018 were approximately $437m

• For customers of authorised representatives, Westpac has not yet been able to finalise a reliable estimate of the proportion of fees that may need to be refunded

• Interest on refunded fees and additional costs to implement this program will also need to be considered when determining any remediation provisions

Westpac should ‘expect ongoing challenges’

Westpac Group’s wealth revenues will fall by around $300 million over the next two years, according to Morgan Stanley, following the bank’s restructure and exit from financial advice, via InvestorDaily.

Westpac is still retaining its private wealth, platforms, superannuation and insurance operations, with the new report estimating that wealth will account for less than 10 per cent of revenue in the bank’s consumer division and around 20 per cent in the business division after the restructure.

Morgan Stanley has forecast that Westpac’s wealth revenues will fall from more than $2 billion in FY18 to less than $1.7 billion in FY20, due largely to the non-recurrence of the $144 million Hastings exit fee and the loss of advice revenues.

The report downgraded the bank’s FY19 cash profit by around 2.5 per cent, due to exit and restructuring costs and a $100 million loss from wealth advice.

It has, however, upgraded its prediction for earnings per share by 0.5 per cent in FY20, citing the exit of the loss-making advice business.

Westpac had estimated it would save around $73 million by dropping the advice business and division.

“The exit from wealth advice is a logical response to the changing environment, but we expect ongoing challenges in the remaining wealth business,” Morgan Stanley noted.

Challenges will include the effect of the royal commission’s recommendations on the cross-selling of insurance to banking customers and reduced vertical integration benefits without advice, the report said.

The analysis also eyed other potential impacts such as pricing cuts in the platform market, new technology platform players winning an outsized share of flows and industry super funds growing in both personal and corporate super.

The retained businesses accounted for around 9 per cent of group revenue in FY18, excluding one-off items.

The analysis also forecast Westpac will have accumulated $775 million in customer refunds, remediation and litigation costs across banking and wealth management over FY19 and FY20.

Morgan Stanley has retained its rating of Westpac as underweight, saying it sees lower returns and rising risks in retail banking among other factors, with the analysis warning there could be risk of a further derating.

Westpac Restructures Wealth Advice

Westpac has announced changes to the way it addresses customers’ wealth and insurance needs, which includes a significant move to a referral model for financial advice by utilising a panel of advisers or adviser firms. Clearly a reaction to the Royal Commission.

Westpac chief executive, Brian Hartzer, said: “We are committed to supporting our customers’ insurance, investment and superannuation needs as part of our service strategy. The changes we’re announcing today are about focusing our investment where we have genuine competitive advantage and growth opportunities.”

The group says the changes reflect its commitment to supporting customers through their financial lives, while responding to the changing external environment.

In summary the Group is:

• Realigning its major BT Financial Group (BTFG) businesses into the Consumer and Business divisions

• Exiting the provision of personal financial advice by Westpac Group salaried financial advisers and authorised representatives

• Moving to a referral model for financial advice by utilising a panel of advisers or adviser firms

• Entering into a sale agreement as part of the exit with Viridian Advisory, which will see many BT Financial Advice ongoing advice customers offered an opportunity to transfer to Viridian. A number of the Group’s salaried financial advisers and support staff will transition to Viridian from the anticipated completion date of 30 June 2019. Some authorised representatives may also move to Viridian by 30 September 2019

• Simplifying the Group’s structure and re-organising Group Executive responsibilities

• Continuing to invest in the BT brand, reflecting its strength and market position, although BTFG will no longer be a standalone division

• Unlocking value by exiting a high cost, loss-making business. We expect the costs associated with exiting and restructuring will be offset by future cost savings.

The announcement comes with a re-organisation of group executive responsibilities. 

The consumer division will be led by the current business bank chief executive, David Lindberg.

GM commercial banking, Alastair Welsh, will lead the business division on an acting basis, while a global executive search is conducted for Lindberg’s replacement.

Consumer bank chief executive, George Frazis, will leave Westpac to pursue other leadership opportunities.

Brad Cooper will stay on to ensure the successful transition of BT’s businesses into their new divisions, following which Cooper has indicated that he will leave to seek a new leadership role outside the group.

Westpac denies offering ‘bundled services’ to win BT customers

Westpac chief executive Brian Hartzer has denied claims that Australian employers are offered special deals from the bank if BT becomes the default superannuation provider for employees, via InvestorDaily.

Appearing at the House of Representatives Standing Committee on Friday, Mr Hartzer was questioned about the major bank’s superannuation offering through BT Financial.

Labor MP Matt Thistlethwaite asked the Westpac CEO about reports that employers could be prosecuted for the underperforming retail super funds that manage staff retirement savings. 

Mr Thistlewaite referred specifically to a 21 January news article in The Australian that noted Westpac’s BT super fund was one of the worst performing super funds in the last seven years. 

“The article points to ‘bundled services’ for the business behaving employees in your BT retail fund. What are those bundled services?” the MP asked. 

Mr Hartzer said he was not familiar with the news article. 

“I’m assuming that bundled services means you provide concessions to the employer on other banking products for bringing them into BT’s fund?” Mr Thistlethwaite said. 

Mr Hartzer replied: “We checked quite closely and that is not our practice. The corporate super that is offered up is meant to be on a competitive basis for the services provided. We don’t provide inducements in terms of banking.”

Concerns over the relationship between retail super funds and employers were raised by the Productivity Commission in its report into the superannuation sector. Released in January, the report recommended the creation of a ‘best in show’ list of funds for employees to choose from. 

In December last year, The Australian reported that ASIC commissioner Danielle Press said the regulator would crack down on employers who placed employees in poor-performing funds in exchange for “bundled services” that were provided to them by the banks and finance companies that owned the funds.

“We’ve got to look at the role of employers in the default system and how they are making their decisions on what funds are their default funds,” Ms Press told The Australian.

“At the end of the day, consumers are disengaged. There’s no obligation on employers to make that default choice in the best interest of their employees.”