Westpac needs an external CEO for a significant reset, says MST Marquee’s Brian Johnson

Westpac’s significant operational turnaround needs the introduction of an external chief executive officer sooner rather than later, banking industry experts say.

MST Marquee analyst Brian Johnson.

Westpac’s “significant” operational turnaround needs an external chief executive officer sooner rather than later, veteran banking analyst Brian Johnson says.

Mr Johnson, a well respected analyst with MST Marquee, told clients in a note that Westpac’s “long-running operational underperformance” meant a new external leader was crucial for a full turnaround.

“We think Westpac requires a significant reset and that requires an external CEO successor,” Mr Johnson said, and that its mammoth IT simplification project “could yet consume much of (its) perceived existing core equity tier one capital”.

The comments come after The Australian reported Westpac’s new chairman, Steven Gregg, has told investors and analysts the board is actively seeking to replace chief executive Peter King by the end of the year. 

Mr King had resigned in 2019 but soon after that was obliged to take the top job when both the then CEO, Brian Hartzer, and chairman Lindsay Maxsted announced they would leave in response to the bank’s financial crimes scandal.

Westpac’s incoming chairman, Steven Gregg. Picture: Tertius Pickard

Mr King is widely credited with steering the nation’s second largest home-loan financier through a very difficult period and stabilising it since then, but Westpac’s turnaround is only half done.

The bank’s multi-year risk and regulatory upgrade program of work – which has been a large driver of the bank’s more than $5.8bn investment spend since 2019 – should be complete well before the end of the year.

With that, Westpac is now planning to consolidate two thirds of its 180 back office systems into “just” 60 or fewer over the next four to five years at a cost of about $2bn per year.

But Mr Johnson said “history suggests bank IT projects cost more, take longer and can compromise system stability during decommissioning”.

As an example of that, he said the “core banking modernisation” program at Commonwealth Bank was slated in 2008 to cost $510m and take three years. Five years after that it had cost about $1.5bn, and excluded Bankwest and mortgages.

Westpac is due to brief investors about its technological turnaround plans on March 27. However, Mr Johnson said the current succession process suggested the “management team presenting will not be responsible for delivering the project”.

Investors had expected Mr Gregg’s arrival could trigger a change of guard at a bank still undergoing reconstruction and facing four years of negative shareholder returns. But few were expecting it so soon.

In July, the Sydney-based lender telegraphed a succession plan within a few years. Newly reshuffled internal candidates – business banking head Anthony Miller and consumer banking boss Jason Yetton – were evaluated over that period.

At the time, Mr King stated he had “plenty to do” before stepping down and the bank’s message to investors was that he was highly motivated in his role.

But two months after arriving at Westpac and following the bank’s quarterly update, Mr Gregg has been meeting with a number of stakeholders seeking feedback from investors on the company’s strategy and to outline his priorities.

It was at these meetings that the chairman flagged the bank would likely be ready for new leadership sooner rather than later.

Tyndall Asset Management head of equities Brad Potter said: “This is an obvious evolution for the company given Peter King was out the door at one stage and then got kept back in as a temporary measure, and then eventually as a full time measure.

“The new chairman obviously wants to put his stamp on the company.” Mr Potter had not met with the new chairman, he said.

Westpac Group chief executive Peter King is due to relinquish the role. Picture: Richard Dobson

The accelerated timeline for a change of guard at the bank might mean it could be too soon to promote either of the internal candidates to the top job.

Opal Capital chief investment officer Omkar Joshi said it would “be better to have a fresh set of eyes by appointing someone externally”.

“Peter King managed to stabilise the bank, but there is still a significant amount of work to do.”

Westpac is currently undertaking a candidate search for its leader to drive growth and complete the next step of the multi-year simplification agenda.

DNR Capital chief investment officer Jamie Nicol said: “It’s important to have a CEO who is going to own the IT project.

“Given that’s just about to start, you probably want the appointment sooner rather than later, unless Peter King was there to oversee the whole thing, but that would be four or five years.

“That’s probably too long given that he was just about out the door before and he extended his stay.”

Mr Johnson said a turnaround for Westpac might require significant write-offs and restructuring costs. Investors contacted by The Australian acknowledged that and downplayed concerns that execution risks would be much higher with an external CEO compared to the current situation.

“There’s a lot of risk in the execution as it stands now,” Mr Potter said, adding that Westpac had long underinvested in its core business infrastructure.

“That’s hurting them now and they’ve still got a long way to go with the rehabilitation of their IT and AML systems.

“The risk is already there. It’s hard to know if an external CEO increases that much more.”

Mr Johnson noted that strong management was a key driver of shareholder value in banks, saying that despite its problems, Westpac’s stock price has benefited from the recent rally in lending stocks.

Westpac shares fell 3.75 per cent on Thursday to $26.47 each, leading losses at the four majors after analysts at Macquarie downgraded their ratings to “underweight” and “underperform”.