For Westpac, the real test lies ahead

Westpac CEO Peter King. Picture: Jane Dempster

Westpac’s Peter King is relatively upbeat on the COVID-19 comeback but the reality is the bank has three years of recovery ahead to overcome its risk culture problems.

While other members of the oligopoly are spending big on growth, King has to devote 47 per cent of his $1.7 billion investment bill to risk and compliance issues.

This compares with 23 per cent in 2016, when 63 per cent was spent on growth compared to just 39 per cent last year for Westpac.

The $1.3bn Austrac penalty is just one element of a risk culture which King and chair John McFarlane acknowledge is in need of a major overhaul.

The good news is the cultural change is coming with the economy still subdued, as evidenced by the $10bn increase in business deposits over the last year against a $6bn fall in business lending.

Business with money is putting it under the pillow and certainly not banging down the door looking for a business loan.

The bad news is that right now, the Australian economy is in a potentially false dawn with a mass of government spending keeping personal income high and businesses afloat. But come the middle of next year, when the handouts are wound back, the real test will come.

If King is right then the calamity will not be as bad as feared but the bank is still looking at another 3.5 per cent fall in business loans this year.

It’s a long way from the maximum bullish figures the Australian Banking Association is releasing to talk up the banks.

The star division for Westpac was Treasury which reported a $901m profit up from $517m a year ago.

Westpac is reporting a 31 cents a share dividend which is the maximum allowed under APRA rules aimed at ensuring the banks keep sufficient capital for any downturn.

The dividend payments of $1.1 billion will be underwritten to the tune of $750m which means new shares are issued.

Shareholders will get their dividend but going forward earnings per share will be diluted.