Westpac chief executive Peter King has outlined plans to strip more than $2 billion from the bank’s cost base in coming years, arguing a “significant reset” was required to remain competitive coming out of the pandemic amid record low interest rates and heightened competition.
Handing down markedly improved first-half cash earnings, Mr King and chief financial officer Michael Rowland today unveiled details of the bank’s anticipated three-year cost plan, targeting an $8bn cost base by 2024 – down from a little over $10bn last year – by selling assets, and simplifying, streamlining and digitising distribution and products.
It comes as most banks laser in on costs to offset the softer revenue and return environment of recent years, impacted by low interest rates, increased regulatory, remediation and compliance spending, mixed credit growth, greater competition and subdued fee income.
“A significant reset is required to ensure the business is cost competitive over the long term, particularly as we navigate the pandemic’s recovery phase and an extended low-rate environment,” Mr King said. “We need to do things differently to deliver a competitive cost base, including continuing to redesign and digitise many of our processes.”
In the first of several closely watched results from the industry in the coming week, Westpac’s numbers paint a clear picture of the economy’s faster than expected recovery, with an impairment benefit on the back of improved asset quality and the better economic outlook helping to boost cash earnings 256 per cent to $3.54bn, or 60 per cent ex notable items to $3.82bn, compared to the prior corresponding half.
The bank was also benefiting from self-help initiatives, including its new “line of business” operating model, returning its large mortgage book to growth, up $2.6 billion in the past six months, Mr King said. Return on equity ex notable items improved to 11 per cent, while the net interest margin lifted six basis points on the prior six months to 2.09 per cent.
The performance, which Mr King described as “promising”, and strong CET1 capital ratio of 12.34 per cent supported a higher interim dividend of 58 cents per share, payable 25 June. The bank’s improving confidence was also reflected in the move to neutralise the dividend reinvestment plan, which involves buying shares on market rather than issuing them to avoid dilution.
Mr King said despite ongoing uncertainties, the Australian economy was rebounding and the outlook positive, supported by the booming housing market and consumer sentiment running at its highest level in more than a decade.
“Most significantly, unemployment is falling and there are more people employed now than pre-COVID. A strong labour market will continue to support growth in the economy,” he said, adding the economy was likely to expand by an above-trend 4.5 per cent in 2021.
“While we expect continued increases in home prices, as the supply of houses for sale increases, the rate of house price growth will likely moderate. Businesses are positive, with most industries responding to the brisk rebound in activity and the winding back of COVID-19 restrictions.”
For Westpac, Mr King said while significant work remained in its turnaround, good progress had been made implementing its “Fix, Simplify and Perform” strategic priorities and improving the performance of key businesses, particularly mortgages. While no update was given on asset sales, he said the bank was “continuing to assess what is in the best interests of shareholders regarding the ownership of our New Zealand business”.
“With a stronger economic outlook, and as Westpac becomes a simpler and stronger bank delivering more for customers, we are well positioned to deliver returns for shareholders,” he said.