Rising pressures on profit margins and the prospect of more to come has forced Westpac and its CEO Peter King to bring forward by two years the bank’s long promised target date for lower costs.
Westpac had been promising a serious cost cutting campaign that would produce results by 2024 onwards but the weak ending to the bank’s 2020-21 financial year last September saw analysts and some investors start clamouring for an earlier start to the assault.
The campaigners were given some support from chair John McFarlane who was quoted in a Westpac interview in late December (ahead of the AGM just before Christmas) as saying he had “a “dead simple” message on the bank’s three-year “fix, simplify, perform” turnaround plan: get it right – and don’t muck around.
“A, we’re going to get it right; and, B, we’re going to get it done,” Mr McFarlane said in the interview ahead of the AGM.
On Thursday we found out that the axe has been taken out and wielded with 1,100 staff in the bank’s corporate area losing their jobs in the three months to December.
The plan also saw two departures from his senior management team as it revealed a 74% rise in cash profits in the December quarter to $1.58 billion.
If anything, the 74% figure was meaningless – the improvement was driven almost entirely by gains on asset sales and revaluations, and profits edged up by just 1% after these one off items were excluded.
Westpac’s profit margins narrowed sharply due to stiff competition, and it warned of more margin pressure to come as the battle for share in the home loan market remains hot and at times over-heated.
Last year Mr King said the lender would aim to cut its cost base to $8 billion by 2024, and on Thursday he said it had started implementing part of this plan by seeking to reduce the size of its corporate functions by about 20%.
That saw more than 1100 jobs, including contractors, out the door in the December quarter.
“We have made a sound start to the year, and we are seeing the cost benefits of our simplification programs. The environment, however, remains highly competitive, and we continue to see pressure on margins,” Westpac Chief Financial Officer Michael Rowland was quoted as saying in the Westpac statement to the ASX.
“Given this, we are bringing forward our simplification plans and changing our operating structure to improve efficiency and move more of our people closer to the customers they support.”
In the executive restructure, Westpac is combining two senior executive positions – chief risk officer and group executive for financial crime, compliance and conduct – with the two executives in these roles, David Stephen and Les Vance, to leave the bank.
The latest restructure comes after the bank raised the profile of the financial crime executive role following its massive money laundering scandal in 2019.
“Two years ago, we elevated financial crime to a dedicated executive role to ensure we had a single focus on improving our performance. While there is still work to do, the time is now right to simplify accountabilities with all of our risk function under the CRO,” Mr King said.
The bank says it has hired Ryan Zanin from US lender Fannie Mae to fill the new position.
The restructure detailed by Mr King on Thursday includes moving services such as human resources, finance and technology into the business departments they serve within the bank, and a move to a “lead” head office responsible for setting strategies, polices and frameworks across the bank.
“We are building a simpler bank, streamlining our organisation and lowering the cost of running the group,” Mr King said.
For all that talk of change, investors will judge the success of the restructure and cost cuts by its impact – positive of course – on profit margins.
Its key measure – the net interest margin dropped sharply by 8 basis points to 1.91% in the December quarter, due to a rise in its holdings of illiquid assets, and tough competition in business and mortgage lending.
It said total operating income was flat, while expenses fell $191 million in the quarter as a result of its cost-cutting.
Westpac said its stressed loans declined as a proportion of its loan portfolio, with mortgage delinquencies falling despite temporary job losses because of Covid.
The bank said the Covid omicron had not so far led to a rise in financial stress in its loan book, but it nevertheless the lender took a precautionary impairment charge of $118 million as it saw the “downside” economic scenario in its planning models becoming more likely.
That will be something analysts and investors will be looking for in the half year results from the Commonwealth Bank next Wednesday.
Westpac finished the quarter with a strong capital ratio of 12.2%.
Westpac shares rose 2.2% to $21.07 as investors edged into buying the cost-cutting story.
