Doubt over dividend, as Westpac flags $1.2bn second-half profit hit

Investors to turn attention to whether Westpac will pay second-half dividend, after it warned cash earnings to take $1.22bn hit.

Picture: Jono Searle

Westpac’s investors will turn their attention to whether the bank will pay a second-half dividend, after it warned cash earnings would take a $1.22bn hit due to writedowns, higher customer compensation and a record Austrac penalty.

Westpac revealed on Monday that new charges and provisions worth more than $800m, combined with previously-announced Austrac penalty matters, would have an impact on its second-half results.

ANZ kicks off the major bank reporting season on Thursday and is followed next week by annual profit results from Westpac and National Australia Bank.

Westpac’s new disclosures included writing down the value of its life insurance business, at a cost of $406m, and lowering the value of intangible assets in the auto finance business to the tune of $125m.

The bank attributed the impact of COVID-19 on asset values and a review for the impairment of capitalised software for some technology systems, amounting to a before-tax cost write-off of $71m.

Westpac added that it would lift the provision and costs related to the biggest breach of Australia’s money-laundering and terrorism financing laws in history by $415m. This included $404m in provisions associated with the bank agreeing to a $1.3bn settlement with financial-intelligence agency Austrac.

Westpac had already set aside $900m for the penalty earlier this year, before agreeing to a higher settlement with Austrac, which was signed off by the Federal Court last week.

Westpac’s announcement on Monday included an increase in provisions for customer refunds, associated costs and litigation provisions of $182m after tax, and asset sales and revaluations which reduce cash earnings by $55m after tax.

In total, the bank announced $816m in new notable items, which it said with the Austrac provisions would reduce its common equity tier one capital ratio by 24 basis points.

Westpac, which ruled off its financial year on September 30, said cash earnings and statutory profit would also be reduced by the new provisions and charges.

The sector’s results season ramps up against the backdrop of guidance from the banking regulator, which capped dividend payments during COVID-19 to as much as 50 per cent of statutory profit.

Investors will be hoping Westpac resumes paying dividends in the second half, given it opted not to make an interim payment in light of the pandemic and a recession gripping the domestic economy.

Morgan Stanley analyst Richard Wiles expects Westpac to pay a final dividend of 25c a share, despite lower profits.

“All else equal, our second-half 2020 estimated reported profit will be about 12 per cent lower,” he said.
“After adjusting for these charges, our estimated final dividend of 25c would imply a second-half 2020 payout ratio of circa 57 per cent and an full-year payout ratio of circa 33 per cent.”

Credit Suisse analyst Jarrod Martin said the earnings update and notable items highlighted by Westpac were “generally in line” with market expectations, although the $1.22bn number could cause “sticker shock”.

UBS analyst Jon Mott said Westpac’s disclosures prompted a 20 per cent cut to his estimate for cash earnings-per-share.

“This large percentage downgrade partially reflects the low base effect, given subdued earnings as a result of the recession,” he added. But UBS did not change its expectation for Westpac to pay a final dividend of 35c a share.

The bank’s shares dipped 0.4 per cent to $18.70 on Monday.

On new customer remediation, Westpac said net interest income was being repaid due to mistakes including customers being provided with business loans where they should have received a consumer loan.

For non-interest or new fee income in the compensation pool, some related to customer refunds for incorrectly charged insurance commissions and reviews of advice provided by aligned financial planners.

Westpac also outlined $104m in additional costs for implementing the customer compensation

program, including to accelerate payments, and $38m for litigation inclusive of settlements.

The latest ratcheting up of Westpac’s customer remediation takes its total to about $1.7bn. Analysts will also be closely watching Westpac commentary next week on expected loan losses.

Westpac’s latest update follows NAB on Friday warning that its second-half profit would be dented by higher customer compensation, property impairments and a swelling balance to repay staff for an underpayment blunder. The Melbourne-based bank said the total hit to cash earnings would be $264m in the six months ended September 30, while the impact on net profit attributable to shareholders would be $450m.

Westpac used Monday’s announcement to say its annual results would include the new Specialist Businesses division. That unit includes a string of businesses including life insurance, general insurance, investment platforms and auto finance that the bank is considering divesting.

The change in the reporting structure — which has no impact on cash earnings — sees Westpac move businesses from the consumer, business and institutional bank divisions and reallocate centrally managed costs.

The new charges outlined by Westpac include the revaluation of its insurance liabilities and a loss on the agreed sale of its vendor finance business. Those items were partly offset by the gain on the revaluation of Westpac’s stake in ASX-listed Zip during the six months ended September 30.

Westpac offloaded the holding last week and on Monday said the sale was expected to result in a pre-tax gain of about $26m for the first-half 2021 results. The sale of the 55.2 million Zip shares is expected to add eight basis points to Westpac’s common equity tier one capital.