Westpac to take $282m hit to first half profit

Westpac will take a $282m hit to its half-year profit, mostly due to extra provisions for customer refunds and litigation.

Westpac will kick off the major bank interim profit reporting season next Monday. Picture: Christian Gilles

Westpac will take a $282m hit to its half-year profit, mostly due to extra provisions for customer refunds and litigation.

The bank announced on Monday a series of provisions, writedowns and losses worth $588m, partly offset by a $288m net gain in the group’s Coinbase investment after the cryptocurrency exchange platform’s recent initial public offering.

There was also an $18m profit on the sale of its stake in buy now, pay later group Zip Co.

Of the $282m in notable items, $212m was announced in the first-quarter market update, with the remaining impact on net cash earnings accrued in the second quarter.

Westpac will kick off the major bank interim profit reporting season next Monday, with chief financial officer Michael Rowland to unveil his much-anticipated cost reduction program.

Citi said in a note on Monday that Westpac’s cost base has expanded at a compound annual rate of 3.5 per cent over the past five years.

Revenue, on the other hand, has retreated at an annual rate of 1 per cent.

While the bank had continually managed to achieve $300m-$400m in productivity gains to offset inflation, the main culprit has been soaring risk and compliance expenditure, up 17 per cent a year to surge from 10 per cent of the cost base to 17 per cent in the 2020 financial year.

Part of the surge has been driven by risk and governance remediation programs following the $1.3bn penalty incurred for millions of anti-money laundering transgressions.

Citi analyst Brendan Sproules said risk and compliance costs in a post-royal commission environment would not revert to 10 per cent of the cost, although a more reasonable level of 12 per cent was likely.

“From (last year’s) peak, we believe this removes about $600m from the cost base, or a 4 per cent absolute cost reduction,” he said.

Mr Sproules said in a report last week that Westpac had one of the best opportunities in the banking sector to drive costs lower and accelerate a profit turnaround, starting with a 45 per cent reduction in its branch network to save $850m across three years.

He said that the bank’s current cost base of $10.2bn could be pared back to $8.3bn by focusing on three main areas: optimisation of the branch network, and non-core asset sales, and moderating risk and compliance expenditure.

Apart from the additional $220m in customer refunds to be booked for the half-year, Westpac’s other one-off provisions and losses include a $115m writedown in capitalised software; $56m in costs associated with ending the IOOF relationship; an $84m goodwill writedown in the lenders’ mortgage insurance business, and a $113m accounting loss on the sale of the Westpac Pacific operation.

Westpac also said on Monday it had changed its software capitalisation policy, lifting the threshold before a project is capitalised from $1m to $20m.

The policy has been applied from October 1 last year, and will result in the group writing off a higher proportion of its investment spending from the first half of 2021.

The higher expense is not treated as a notable item, and the change had no impact on the carrying value of capitalised software at the end of September.

In a further policy change to be introduced at next week’s result, the bank flagged that some businesses in the specialist businesses unit will be designated “held for sale”.

They include vendor finance, Westpac general insurance, Westpac lenders’ mortgage insurance, and Westpac Pacific.

Shares in Westpac closed down 4c at $25.08.