Westpac ditches $8.6bn cost-cutting target as pressure mounts

Westpac has scrapped its $8.6bn cost goal amid rampant inflation but reaffirmed plans to continue slashing expenses and simplifying the bank.

Westpac has scrapped its $8.6bn cost goal amid rampant inflation, the last of the big banks to drop a hard target, but reaffirmed plans to continue slashing expenses and simplifying the bank.

Announcing its results on Monday, Westpac chief executive Peter King said the 2024 cost target would be abandoned, as the bank was facing upward pressure on costs.

Westpac said expenses had come in at $5bn in the first half of the 2023 financial year, with no notable expenses recorded against the bank’s budget for the first time in years.

Westpac posted a 45.9 per cent cost to income ratio, its lowest in almost 10 years.

This takes Westpac’s cost to income ratio to near the market average, and well down from almost 65 per cent in 2020.

Mr King said Westpac would shift its focus from absolute expense targets to improving the bank’s expenses-to-income ratio against its peers Commonwealth Bank, ANZ and National Australia Bank.

“We’re making this change due to expected continuing inflation pressure, ongoing and new risk and regulatory requirements, and our focus on growth,” Mr King said.

Westpac was the only big bank in the period to reduce its expenses.

The bank’s spending on risk and regulatory matters fell 18 per cent in the first half compared to the prior comparable period.

But spending on growth and productivity was up 13 per cent in the half, as Westpac ploughed funds into its mortgage platform and digital capabilities.

Mr King said Westpac remained focused on productivity and simplification, but warned the bank was facing higher risk and regulatory demands.

“The likelihood of persistent inflation and ongoing risk and regulatory demands are putting upwards pressure on costs,” Mr King said.

“We believe this strikes the right balance between cost discipline and investing in our franchise.”

Westpac has spent a lot on improving its regulatory framework after facing a $1.3bn penalty from Austrac in 2020 for breaking anti-money laundering laws.

The bank also faced the ire of the Australian Prudential Regulation Authority, which demanded an enforceable undertaking to improve risk and governance measures.

Mr King noted the bank was 87 per cent through its transformation plan, but had suffered delays in governance and risk culture projects which required additional spending in the period. Westpac has been selling off arms of its business.

The bank noted it had exited nine operations since kicking off its cost cutting drive.

The drive began in December 2020, when Westpac’s New Zealand wealth advisory business was offloaded, followed by the bank’s insurance business.

The nine divestments have topped up capital by almost $2.3bn since 2020.

Westpac was the last big bank to maintain a fixed cost cutting target after ANZ, CBA, and NAB dumped their numbers.

Westpac chief financial officer Michael Rowland said Westpac was bracing for significantly higher costs from suppliers, but noted the bank was still pushing forward with its cost cutting drive.

“This is three halves in a row where we have reduced our costs,” he said.

“What we’ve been able to achieve is covering the increase in inflation on supply costs.”

Mr Rowland noted the bank was facing inflation running at 7.5 per cent, and higher wage growth, after Westpac agreed to hand staff a 4 per cent pay rise for those paid less than $94,000 and 3.5 per cent for those earning between $94,000 and $118,000.

PwC Australia banking and capital markets leader Sam Garland said all of Australia’s bank had been slashing costs, with the industry average now hovering at a 44 per cent expense to income ratio.

But he warned the “low hanging fruit” that had helped many banks to cut costs was now largely gone.

“At present, there’s the dual costs of maintaining old systems and the new,” Mr Garland said.

Originally published as Westpac ditches $8.6bn cost-cutting target as pressure mounts