Westpac has a way to go to claim CBA’s mantle

After the abrupt eviction of long-time resident CBA, there’s an attractive vacancy in banking for a well-behaved market leader.

After the abrupt eviction of long-time resident Commonwealth Bank, there’s an attractive vacancy in banking for a well-behaved market leader, provided it can demonstrate at least some revenue growth.

No candidate seems to fit the bill at the moment.

However, behaviour is relative, and Westpac is about as clean as they come in the current environment.

On the revenue front, the Sydney-based lender also has nothing to write home about, although 2 per cent growth for the March half-year at least shifted the dial.

National Australia Bank recorded 0.7 per cent, ANZ was static, and CBA’s conduct was so reprehensible it now has to implement 35 behavioural recommendations by its regulatory guardian APRA.

Credit Suisse analyst Jarrod Martin’s reckons Westpac was the best-performed major bank by a fair margin.

“Its profit margin and revenue growth were better, and costs were controlled,” Martin says.

“There was a lot of negativity about Westpac coming into the results season but that’s effectively been dealt with.”

Negativity is an understatement.

Westpac’s market value crashed by more than $3 billion after leading UBS bank analyst Jon Mott penned a damning note on Westpac’s controls over its over mortgage serviceability requirements, using a PricewaterhouseCoopers review that was released by the financial services royal commission.

While all the major banks were part of the APRA targeted review, Westpac was the outlier, and not in a good way.

PwC found Westpac had not completed all minimum income verifications in 29 per cent of the 420 sample mortgages, with 86 per cent of the sample assessing living expenses as equal to the much criticised household expenditure measure benchmark.

All the banks rely heavily on HEM to assess a customer’s living expenses, but Westpac was the heav­iest user of the benchmark.

Chief financial officer Peter King told analysts yesterday that PwC’s spreadsheet analysis, drawn up as part of the targeted review, included a data set that was incomplete.

This was because the scope of PwC’s work was restricted to information on the credit file and not all the information available to the loan officer.

Any conclusions were therefore likely to be “incorrect”.

When Westpac reviewed the loans in the sample, it found all of them would have been approved expect one, which is ahead on its repayments anyway.

Further, when the bank init­iated a second review of a much bigger sample of 1300 files, it found there were “no new issues”.

Interest rates are admittedly at a record low, but Westpac currently has only 398 properties in possession, down from 437 six months ago, from a total of 1.6 million home loans.

One of the big issues in the royal commission is that market-sensitive documents are routinely being uploaded to a public website.

Chief executive Brian Hartzer said the royal commission was a good process, and there was clearly a need for transparency and to make information available to the public.

“But it’s important for people to understand that there’s a context for the documents,” the Westpac chief told Four Pillars.

“The financial system is important and banks play a very important role.

“Unintended consequences (from publication) can have a real impact on the economy.”

While Hartzer said the solution was to contact the bank and seek an explanation of the document before publication, no self-respecting analyst is going to effectively ask for a pre-publication seal of approval from the institution under examination.

It’s a problem without an apparent solution.

Ultimately, the banks have no option but to remain hyper-alert and be ready to issue a clarifying statement as soon as they can.

In its review of the major-bank profit reporting season, PwC said headline cash earnings eased 2.8 per cent half-on-half to $15.2bn in the first sign that non-financial risks under discussion for years are now showing up in reported profits.

Banking and capital markets leader Colin Heath said financial deregulation in the 1980s ushered in a credit crisis in the 1990s that informed the industry’s approach to credit risk.

In a similar way, the financial crisis of the 2000s had a big impact on the approach to the market and liquidity risks of today.

“What we are experiencing right now looks absolutely set to provide the road map on conduct and financial risks for the next decade,” Heath said.

Meanwhile, the cost of CBA’s rap sheet of misconduct continued to mount yesterday, with rating agency Fitch revising its outlook for the bank from stable to negative due to risks from having to remediate its operational risk controls and governance.

Fitch warned that the attention of CBA management could be diverted from running the business, increasing costs and weakening the franchise.

There was also a danger that the royal commission could identify additional shortcomings.

On the upside, the APRA report indicated that board rigour had already shown signs of improvement under chairman Catherine Livingstone.

For Hartzer, it’s much too early to adorn him with the mantle of sector leadership after pulling ahead of his peers in a single half-year profit announcement.

There’s a long way to go before Westpac closes in on CBA’s decade of ascendancy.

[e-mail]: @Gluyasr