Westpac (WBC) seems to be softening up investors ahead of reporting its 2014-15 profit on November 2.
In a little noticed ASX filing this week, the bank said the profit report will contain more than half a billion in pre-tax one-off losses on the costs of its big technology push revealed in its new strategy update on September 7.
As a result the bank will be spending more on technology, software and training and this will have an impact on earnings – sort of. The bank says the write-downs will be taken as a non-recurring item before tax and will be excluded from the key measure – cash earnings.
The bank said there will be “a reduction in the capitalised software balance of $505 million (pre-tax)” and “the Full Year 2015 software amortisation cash earnings expense is expected to be approximately $570 million.”
Westpac warned that the November 2 report would include a number of non-recurring items. These include the gain on the partial sale of Westpac’s holding in Bankers Trust Investment management of $665 million (post tax), and the $354 million (post tax) impact of the reduction to capitalised software balances.
And the bank warned the market that spending on new technology and software “are expected to be higher in Full Year 2016 cash earnings”.
Westpac said that in its statement on September 7 it said “that, in light of the Group’s revised technology and digital strategy, the rapid changes in technology , and evolving regulatory requirements, it was reviewing the accounting approach applied to investment spending.”
"This review is now complete, and has resulted in the following accounting changes:
- Directly expensing more project costs compared to recent years;
- Moving to an accelerated amortisation methodology for capitalised software assets, impacting most existing assets with a useful life greater than three years; and
- Writing off the capitalised cost of regulatory programs, where regulatory requirements have changed.”
"The balance sheet impact of these changes will see a reduction in the capitalised software balance of $505 million (pre-tax) reported as an expense in Westpac’s Full Year 2015 statutory results. This will be excluded from cash earnings.
"Total technology investment expenses are expected to be higher in Full Year 2016 cash earnings reflecting:
- An increase in technology investment spend and the impact of directly expensing a higher portion of project expenditure following this accounting change; and
- A small increase in software amortisation expense as the accelerated amortisation approach for projects with a useful life greater than three years offset s the lower amortisation from the reduction in capitalised software. The Full Year 2015 software amortisation cash earnings expense is expected to be approximately $570 million.
"As outlined in our Strategy Update our intention is to manage expense growth in the 2 – 3% range, inclusive of the higher technology investment expense," the bank said.
The change in capitalised software treatment has no impact on Westpac’s regulatory capital ratios, as capitalised software is already deducted from regulatory capital.
"Westpac is scheduled to announce its Full Year 2015 results on 2 November 2015 and as previously advised, will be reporting some large infrequent items that are to be excluded from the calculation of cash earnings.
"These include the gain on the partial sale of Westpac’s holding in BTIM of $665 million (post tax), and the $354 million (post tax) impact of the reduction to capitalised software balances outlined above.”
Westpac shares rose 0.5% to $30.52.
