Westpac delivers a strong, high quality result
4 November 2013
Highlights FY13 (compared with FY12)1 :
- Statutory net profit of $6,816 million, up 14%
- Cash earnings of $7,097 million, up 8%
- Cash earnings per share of 228.9 cents, up 6%
- Core earnings2 of $11,123 million, up 4%
- Sector leading expense to income ratio of 40.9%
- Sector leading capital position with common equity tier 1 ratio of 9.1% up 94 basis points (bps)
- Final fully franked ordinary dividend of 88 cents per share (cps); total ordinary dividends of 174cps, up 5%
- Final fully franked special dividend of 10cps; total FY13 special dividends of 20cps
- Cash return on equity (ROE) of 16%, up 51bps
Westpac Group today announced statutory net profit increased by 14% to $6,816 million for the 12 months to 30 September 2013. Cash earnings grew 8% to $7,097 million and cash earnings per share increased 6% to 228.9 cents for the same period.
The result was driven by a strong performance across all operating divisions, with each contributing higher revenue and earnings, supported by a further improvement in asset quality.
Westpac Group Chief Executive Officer Gail Kelly said: “I am very pleased with our 2013 result. It demonstrates strength, consistency, careful balancing of growth and return, and disciplined execution of our strategy.
“I am particularly pleased that all of our operating divisions and brands contributed positively to the result. It demonstrates the quality of the performance, with cash and core earnings up across the board.
“Our balance sheet strength is sector leading, and we have continued to improve our funding profile, building further capital and maintaining our superior asset quality.
“We have built a stronger company, delivering improved services and value for customers, as well as higher returns for shareholders.”
Mrs Kelly said that 2013 had been a year of significant milestones for the Group, including:
- Growing in target areas, in particular customer deposits (up 10%), Bank of Melbourne (growing mortgages at 3x system and household deposits at 5x system)3, Asia trade finance (up 33%), wealth (Westpac Retail and Business Banking has the highest wealth penetration of the major banks up 38bps to 21.2%)4 and digital (active customers up 220bps to 40.7%)
- Launching ‘Business Connect’, a new model for serving small business customers in St.George
- Rolling out new branch concepts including 17 Bank Now Westpac branches, 15 Bank of Melbourne branches, and the redesign of St.George branches as part of its Fresh Start program
- Expanding Westpac Institutional Bank’s (WIB) operations in Asia with increased presence in China and India, and becoming one of only two Australian banks to provide A$-Yuan direct currency trading services
- Announcing an agreement (post financial year end) to acquire the Australian businesses of Lloyds Banking Group, without needing to raise additional capital
- Substantially completing the five year Strategic Investment Priorities (SIPs) program which has improved the stability of the Group’s technology and upgraded front end systems. A new online and mobile banking platform is currently being piloted, the first phase of a new wealth platform is being finalised and WIB technology has been upgraded to create an integrated global payments platform
- Delivering $225 million in savings from productivity programs
- Improving customer service and productivity with simpler processes including reducing the business lending cycle time by five days, increasing the number of business applications that are ‘first time right’ by 56%, reducing the time taken to complete BT’s Super for Life application to 60 seconds and reducing the time taken to process life insurance applications by 18%. Revenue per full time equivalent employee has increased 6% and revenue per financial planner is up 16%; and
- Recording the Group’s highest ever staff engagement score of 87%, ahead of the global high performing norm5.
Capital position and dividends
The Group’s common equity tier 1 ratio increased 94bps to 9.1%, well above the Group’s preferred range of 8.0% to 8.5%. It equates to 11.6% on a fully harmonised Basel III basis.
“We are in a very strong capital position and are comfortably ahead of regulatory and internal benchmarks,” Mrs Kelly said. “This strength has enabled us to strike the right balance between providing additional value to our shareholders and remaining appropriately conservative and able to fund our future growth plans.”
In that context, the Board has determined to increase the final dividend to 88cps fully franked, taking the full year dividend to 174cps fully franked, an increase of 5% on last year (FY12: 166cps). A further special dividend of 10cps fully franked will also be paid to shareholders (taking total special dividends for the year to 20cps, fully franked).
The Group will arrange for the purchase of existing shares to satisfy the dividend reinvestment plan for the 2013 final and special dividends.
- Other key aspects of the FY13 result compared to FY12 include:
- Net operating income rose 4% to $18,833 million and operating expenses increased 4% to $7,710 million
- Net interest income increased $349 million to $12,912 million, with a 4% rise in average interest-earning assets and a 2bps decrease in margins due to lower Treasury earnings. Excluding Treasury and Markets the margin was up 1bp to 2.06%
- Lending increased 4%, or $22 billion, with a 4% rise in Australian housing loans. Disciplined growth in lending was partially offset by higher repayments as customers took advantage of lower rates to repay loans faster
- Customer deposits increased $35 billion to $383 billion, up 10%, more than funding loan growth for the year. The customer deposit to loan ratio increased 377bps to 71.4%
- Non-interest income was up $408 million to $5,921 million, a 7% increase, with wealth management, insurance income and trading income all higher
- Impairment charges were $365 million lower, down 30%, due to asset quality improving further
- The Group retired $8 billion in Government guaranteed debt and boosted liquid assets by $15 billion to $126 billion
- Expense to income ratio of 40.9%, the lowest in the sector; and
- A cash ROE of 16.0%, up 51bps, notwithstanding a stronger capital position.
Divisional performance: FY13 Cash earnings growth in each business
|Cash earnings ($ million)||FY13||2H13||1H13||% increase
|Australian Financial Services||4,478||2,302||2,176||12||6|
|Westpac Retail & Business Banking||2,300||1,184||1,116||9||6|
|St.George Banking Group||1,441||726||715||17||2|
|BT Financial Group||737||392||345||13||14|
|Westpac Institutional Bank||1,635||822||813||11||1|
|Westpac New Zealand (A$)||634||336||298||16||13|
Australian Financial Services
Australian Financial Services, which includes Westpac Retail & Business Banking, St.George and BT Financial Group, increased cash earnings 12% to $4,478 million. The result was supported by solid revenue growth, strong margin management and continued expense control.
“Taking a portfolio approach to our banking and wealth businesses in Australia is driving higher revenue and lower costs,” Mrs Kelly said. “We have sharpened the focus and coordination of marketing, differentiated our brands in target markets and better leveraged our resources.”
Westpac Retail & Business Banking delivered cash earnings of $2,300 million, up 9% on last year. The result was driven by a 7% increase in revenue and modest cost growth of 2%. The increase in revenue was supported by disciplined growth in lending, strong deposit growth and good management of margins.
The lift in momentum at St.George Banking Group continued with cash earnings up 17% to $1,441 million. All of the division’s brands – St.George, BankSA, Bank of Melbourne and RAMS – contributed positively to the result, with revenue up 7%. Bank of Melbourne achieved a 10% increase in customer numbers and 3x system growth in mortgages.
BT Financial Group’s performance was strong, with cash earnings up 13% to $737 million. Funds Under Administration increased 17% over the year and Funds Under Management increased 35%, assisted by improved markets, good flows, and FX improvements. Further growth in the planner network and a good result across life and general insurance also contributed. The division continued to deliver strong cross-sell of insurance and wealth.
Westpac Institutional Bank
Westpac Institutional Bank delivered cash earnings of $1,635 million, up 11%. A feature of the performance has been an increased focus on deepening customer relationships which contributed to higher customer activity, particularly in financial markets (both interest rates and FX), and good loan and deposit growth of 5% and 13% respectively. The division benefited from significant improvement in asset quality, which enabled increased write backs and a reduction in associated provisions.
Westpac New Zealand
Westpac New Zealand performed strongly in FY13, with cash earnings up 9% to NZ$770 million (up 16% to $634 million in A$). The result was driven by a further improvement in both business and consumer asset quality and sound balance sheet growth, offset by the impact of industry-wide margin pressure. Growth was strongest in target segments including housing in the sub 80% loan-to-value ratio category. Expenses were particularly well managed.
Group Businesses recorded lower cash earnings of $207 million. This reflects lower Treasury earnings and higher costs associated with new capital instruments.
Mrs Kelly said she was encouraged by signs of improving confidence which was expected to translate into increased lending activity, in particular in New South Wales. She said the Group would continue to remain disciplined, recognising structural changes underway within the Australian economy, and continued volatility in the global environment.
Overall the prospects for the US economy are improving gradually with business and household balance sheets strengthening. China's growth is expected to continue at its more recent, sustainable pace.
“There is no doubt that domestically we are seeing a pick-up in consumer confidence which we expect will translate to a gradual increase in credit growth,” Mrs Kelly said.
“The spring season is already seeing momentum accelerate, and our portfolio of brands is well positioned to benefit from this.
“Equally encouraging is the recent improvement in business confidence, which is central to businesses being willing to borrow and invest. We are supporting this through new initiatives such as ‘Business Connect’ in St.George and a renewed focus on small business in Westpac Retail and Business Banking.
“Our businesses are all performing well, we are seeing tangible benefits from the investments we have made in our digital capabilities and distribution network, and our capital position is the strongest in the sector. This sets us up well for FY14 and should see us continue to deliver high quality, consistent returns for shareholders.”
1 Reported on a cash earnings basis unless otherwise stated. For an explanation of cash earnings and reconciliation to reported results refer to pages 4-7 of the Group’s Full Year Results announcement.
2 Core earnings are operating profit before income tax and impairment charges.
3 Growth multiple is for the 12 months to July 2013 for Victoria and estimated based on ABS new housing finance statistics, State based ABS National Accounts data along with ABA/Cannex surveys.
4 Refer to slide 144 of Investor Discussion Pack for wealth penetration metrics provider details.
5 Towers Watson high performing norm for People Leaders Index.