Confession time indeed at Westpac.
Ahead of the release next Monday of its 2018-19 interim profit Westpac has surprised the market with an after trading revelation of a $617 million earnings hit from customer compensation charges.
The update was issued at 4.13pm and came after the bank’s shares had eased 0.2% to close the day at $25.51.
The reaction from investors on Wednesday will be interesting because Westpac’s news and the size of the hit raises questions about whether the bank will be able to maintain its 94 cents a share interim dividend.
Westpac said on Tuesday that next Monday’s interim would include a $510 million provision for remediation costs, which will reduce after-tax cash earnings by $357 million
The charge relates to advisers who worked as “authorised representatives,” meaning while they were not employed by Westpac, they operated under its financial services licence. The bank is assuming it may pay back nearly a third of nearly $1 billion in fees collected by such advisers in the 10 years to 2018.
The impact will be on top of the $260 million provision for refunding customers revealed in a statement on March 25.
In total, Westpac said provisions for customer remediation would take a $617 million bite out of its first-half profits, or $896 million before tax.
The bank earned an interim cash profit of $4.251 billion (up 6%) in 2018 and assuming no improvement from elsewhere in the bank, cash earnings will fall to $3.6 billion or less.
On this basis, Westpac could still pay an unchanged interim of 94 cents a share, which would cost the bank $3.2 billion, but that assumes no other costs or charges or asset write-downs. The impact of the slide in home lending in the March halfyear will also play a major part in the amount of cash profit, and determining the interim payout.
“While it is disappointing that we have needed to make these provisions, I said at the end of last year that our priority was to deal with any outstanding issues and process payments as quickly as possible,” Westpac chief executive Brian Hartzer said in yesterday’s statement.
Potential compensation payments announced on Tuesday were worth $297 million, with interest costs of $138 million, and remediation program costs of $75 million.
The provision was based on the assumption that Westpac would refund 31% of the $966 million fees collected by its authorised representatives between 2008 and 2010.
But that might not be the end of it with Westpac warning that it has not yet been able to finalise the cost of remediation, as it would need to work with its former authorised representatives to determine if compensation was needed.
National Australia Bank also said in April that its first-half profits would also take a $525 million hit from compensating clients, with most of these charges also relating to wealth management. It reports its results tomorrow (Thursday)
