John McFarlane’s retirement not the end of Westpac’s rebuild
Westpac is still a long way from being an outperformer but this was never going to be achieved in under three years.
Two internal candidates are in the frame as Westpac begins the search for a new chairman to eventually replace John McFarlane, the former ANZ boss who was parachuted in to steer the bank through its biggest crisis since the early 1990s.
Westpac director Peter Marriott, who finished up on Wednesday, was instrumental in helping to lure McFarlane out of retirement – literally – while the one-time bank boss was on a beach holiday over the summer of 2020. In a former life Marriott was McFarlane’s long-serving chief financial officer at ANZ, the banking duo of the era.
McFarlane answered the call to help Westpac, which had been left reeling from a massive Austrac money laundering legal action that forced the ouster of its CEO and chairman. McFarlane, 75, never intended to be around for the long term at Westpac. Indeed, when he signed on two years ago he saw his role as stabilising the bank and putting it back on track. This was a mission he expected would take a few years but reform needed to fix several decades of overpriced acquisitions and underinvestment was always going to take a lot longer.
McFarlane’s decision to retire at next year’s annual meeting will make his tenure a couple months short of three years, but the message to shareholders is that Westpac is now ready to move out of the recovery ward and grow again.
This means the bank, Australia’s oldest, is prepared to look outside and grow its market share again, rather than spending the time inward-focused following the Austrac action. This is a warning shot to rival banks.
A strong sign of this has come in recent weeks as Westpac held talks to acquire payments player Tyro. this week it showed its newly found discipline and made the call to walk away rather than overpay. Another was when Westpac on Wednesday won back the support of investors, securing the backing for its remuneration report after last year’s 30 per cent shareholder protest vote.
As well as appointing chief executive Peter King early in his time as chair, McFarlane helped devise a strategy for the bank to become match fit again through asset sales from auto financing to wealth to focus on core banking.
However, Westpac is still a long way from being an outperformer. The integration of St George is still underway more than a decade later. With one of the highest cost bases of the big four, it needs to become more efficient and more digitally capable.
These areas require longer-term attention under the next chair as well as building up management ranks to eventually take over from King.
Board succession
Two directors are seen as potential internal successors for chair. Leading the way is former KPMG Australia boss Peter Nash, while former Macquarie Atlas Roads chair Nora Scheinkestel is also in the mix. Nash joined the Westpac board in 2018 and Scheinkestel just last year, giving them both a relatively clean break on the Austrac years.
The moment that Westpac can look to the future will be when bank regulator APRA is satisfied the lender has reformed itself enough through a cultural change program. This stands to unlock $1bn in additional capital that APRA has forced Westpac to hold while it improves its risk management as a result of the Austrac failures. Officially this could be as long as 18 months away, but some inside Westpac expect it may get to this point by the middle of next year. Depending on how lending losses are tracking from higher interest rates, Westpac will then be able to return some of these funds to shareholders.
McFarlane said Westpac was now in “good strategic and financial shape” following more than two years of restructuring.
Over his career, McFarlane has been a banker across three continents. As well as ANZ, he has chaired Barclays and Aviva in the UK. At Barclays the UK press gave him the nickname “Mac the Knife” for the deep cuts to the sprawling bank.
His credentials were right for Westpac. He has helped several companies navigate crises, including the early 90s recession, the Asian currency crisis, and the global financial crisis. When he joined Westpac, McFarlane said he had “a track record of fixing banks and making them successful”.
McFarlane noted being a chairman can often be a thankless task. “The last time I was thanked, it was by Frank Lowy when I accepted his invitation to join the Westfield board,” McFarlane quipped to shareholders.
Marriott, meanwhile, signs off after a decade and his retirement ends the last boardroom links from the era of Gail Kelly and the period when Westpac dropped the ball over anti-money laundering defences. Marriott is also a former ASX director and his exit starts to see the ANZ influence on Westpac’s recovery fade.
Back as executives, McFarlane and Marriott often benchmarked their bank’s performance against rival Westpac, which at the time was more evenly matched in size and scale to ANZ. In August the two were close again in terms of a $70bn-plus market capitalisation, but Westpac has since pulled away with a $10bn gap.
Team Magellan
New Magellan boss David George has sought to showcase an entire investment team doing the stock picking with co-founder Hamish Douglass long out of the picture.
But that’s the risk of putting so much focus on a star-stock picker as Magellan has over the past decade. It becomes a tough sell to convince investors there is a bigger strategy around how investment selections are made.
The challenge for George is to convince investors that Magellan’s stock picking research and processes can over a time deliver an edge compared to other global fund managers. It is already starting from behind given the underperformance of the fund over the past 18 months.
Improving performance is the key for Magellan to lifting funds under management, which have halved over the year to sit at just over $50bn.
George put the spotlight on the Magellan portfolio managers to run through their processes as he reiterated his aim for the fund to return to $100bn within five years.
Across the Magellan flagship global funds the focus now on more household names and “quality” companies, which Magellan’s analysts say typically exit a recession in a better position than when they went in. Holdings include Apple and Microsoft in tech and other household names such as Visa, Nestle and L’Oreal.
Magellan chair Hamish McLennan noted it had been an unprecedented year for the firm but still asked investors to back a pay rise for directors at an extraordinary meeting despite the fund and share price losses.
They did so, meaning the pool of funds now available to pay Magellan’s directors will increase to $1.75m from the $750,000 split between four non-executive directors. Magellan wants to boost the number of directors to six, leaving some extra funds for a pay increase for the current board.
There is work ahead for everyone in securing new mandates as many of those old funds aren’t coming back.
McLennan noted: “There are a lot of institutional relationships that were tied to Hamish.”
Douglass remains as an advisor. He has sold down his stake in the firm to below 5 per cent.
The bid to bring former Colonial First State CIO David Dixon onto the board forced the need to lift the cash pool.
johnstone@theaustralian.com.au
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Originally published as John McFarlane’s retirement not the end of Westpac’s rebuild
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