Can Westpac chief executive Anthony Miller turn three banks into one?

Westpac has two major restructuring programs under way. Picture: Luis Enrique Ascui

Anthony Miller is running one of the biggest banks in the land, but for the newish Westpac chief executive it doesn’t always feel that way.

Decisions made by successive management over nearly two decades mean Westpac effectively operates as three separate banks under one roof.

That becomes a $1.8bn problem. Miller can’t capture the scale benefits of a big bank, where running costs are spread across millions of customers.

The Albanese government’s first-home buyer scheme expansion earlier this month highlights the issue.

A minor tech update to lower the deposit floor to 5 per cent cost Westpac $17m, because it had to be done across multiple banking platforms.

“If I only had one system, it would have cost me $10m maximum,” Miller tells The Australian.

“There’s essentially three bank technology stacks in the bank. I need to get it to one so that I can realise the scale benefits. At the moment, I can’t”.

“It’s now all about outcomes”, says Westpac chief Anthony Miller. Picture: Nikki Short

One of those “banks” has now been jettisoned; Westpac has offloaded its $21bn RAMS business it picked up in the early days of the global financial crisis. It sold RAMS for a small loss to a consortium of Pepper Money, KKR and Pimco which are expected to fund the book using KKR’s fast-growing private credit business. RAMS was closed to new business from late last year.

The remaining flagship Westpac bank and St George-branded banks and their respective business banking arms will finally be merged under Miller’s massive $2bn multi-year tech clean-up dubbed “Unite”. The bet: untangling the technology can strip out Westpac’s baked-in high costs.

The investment spend includes business-as-usual and risk spending, but Unite is now claiming a greater slice of the budget.

It’s not just technology. More costs must come out across the bank as Miller pursues another program targeting $750m in annualised savings by decade’s end – largely through job cuts.

The urgency? Westpac’s costs are rising at a blistering pace.

Consider the latest accounts: the cost-to-income ratio (a measure of productivity) surged past 53 per cent, up from 50.3 per cent a year earlier. The second half was worse at 54.2 per cent. For every dollar of revenue, 53 cents is consumed by costs. Those figures current put Westpac last among the big four, including ANZ, and compares poorly to bigger rival Commonwealth Bank, which runs at 45.2 per cent.

For context, if Westpac operated at CBA’s efficiency, it would save approximately $1.8bn annually – money that could return to investors while allowing sharper loan pricing.

With more than 13 million customers, Miller has scale but simply can’t capture the benefits. Complexity and duplication eat it up. It’s not an absence of scale, it’s a failure to leverage it efficiently.

Negative jaws

Miller delivered a 1 per cent drop in Westpac’s net profit to $6.92bn for the year to the end of September, although second-half earnings rose on improved mortgage growth and surprisingly low lending losses.

Miller’s old division, business and wealth, was the standout – small-to-mid-sized business lending jumped 15 per cent, although margins took a hit.

By contrast, mortgage lending rose 5 per cent, lagging the broader market. Westpac’s proprietary home-loan sales fell to 45.1 per cent from 48.2 per cent a year ago, suggesting greater reliance on costly mortgage brokers.

Worse still, new lending in the second half was just 32.7 per cent through proprietary channels, meaning two out of three new mortgages were coming through brokers. Miller is adding specialist bankers to arrest the drift.

Westpac returned “negative jaws”: revenue up 4 per cent while expenses jumped 9 per cent. The full-year dividend came in at $1.53 a share, up from $1.51.

Strong performance in business lending and expectations some of the $3bn in surplus capital will be returned to investors helped push Westpac shares up 3 per cent to $39.88, just short of their recent record high.

Westpac will need to get more productive. Picture: Enrique Ascui

Westpac’s results will set the tone for the major bank reporting season over the two weeks, whereby costs and simplification will be firmly on everyone’s agenda.

Under former boss Peter King, Westpac attempted, but abandoned, a plan to slice $2bn from annual costs. He slashed hundreds of jobs but rampant inflation swamped the cuts.

At ANZ, new chief executive Nuno Matos has drawn a fresh line in the sand on costs. This month, Matos outlined a $1bn-plus overhaul, cutting 3500 jobs in the coming years as he targets a cost-to-income ratio in the “mid-40s” by 2028. Matos also wants to lift ANZ’s returns target to 12 per cent.

Miller moved first on cost cutting, laying out plans earlier this year to get Westpac’s efficiency ratio “below the average of his peers” and return on equity “above peer average”. Westpac’s return measure fell below the critical 11 per cent mark last year, showing it drifting backwards.

Still, the Westpac boss doesn’t feel pressure to go harder on costs.

Miller, who took charge last December, says he respects Matos “immensely” and what he’s trying to do at ANZ. Matos has put down a marker and Miller wishes him well.

But Westpac’s unique issues require a structural reset through Unite. This is about the productivity equation, and Miller prefers dropping progress along the way rather than putting some “bold number” into the market.

Credit card and personal loan losses are drifting lower, a sign of health returning to the economy. Source: Westpac

Miller concedes Westpac lost the right to promise numbers when it missed its own targets four years ago. “Frankly, what we need to do is deliver and then talk about our numbers and outcomes,” he said.

In many ways, Miller faces a steeper challenge. Westpac has now emerged from a period of intense regulatory scrutiny and rebuilding following its anti-money laundering scandal five years ago. Credit quality is excellent and its balance sheet rock solid, but the lender is dragged down by being a cost laggard.

The latest numbers show this. Underlying profit is essentially flat, returns are declining and the efficiency gap with rivals is widening.

Any broader slowdown in the economy will send the bank backwards at a quicker pace.

Unless Miller can unite Westpac, it will be stable but stuck – neither in crisis nor competitive.

RBA message

One of the big economic messages from Westpac’s latest full year accounts is the dramatic improvement in credit quality across the nation. The Westpac figures come as the Reserve Bank is on Tuesday expected to keep the cash rate on hold at 3.6 per cent and for longer amid signs of inflation retuning.

Westpac’s own numbers show 90-plus day mortgage delinquencies fell from 1.12 per cent to 0.73 per cent, returning to the lowest point before the cash rate started moving up.

Credit card delinquencies – a reliable forward indicator of broader stress in the economy – have also fallen noticeably lower. Both of these data points are significant, it signals peak mortgage stress from rate hikes has clearly passed and after three cuts in the current cycle, should give the central bank plenty of comfort to keep the cash rate on hold. It also shows that the recent round of wage growth is catching up to living costs.

The lower lending losses were a big factor underpinning Westpac’s full year profit, which was largely flat at $6.92bn for the year to end-September.

Westpac’s economic modelling has inflation spiking to a worrying 3.7 per cent in the December quarter this year before slowly drifting back down into the RBA’s target band. It expects mortgage growth to hold steady, while fast-paced business lending will cool slightly.

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