Westpac chief financial officer Michael Rowland has formally kicked off the major task of resetting the bank’s cost base, assuring the new $8 billion target will be reflected across the company with all leaders accountable for the delivery of clear goals.
Revealing the details of the three-year cost plan today as part of the bank’s first half results, Mr Rowland said the bank needed the absolute cost reduction target – an $8bn cost base by 2024 down from $10.2bn in full-year 2020 – to take a harder line, materially shift the bank’s cost base and drive accountability. Investment spending will remain around current levels, expected to total $3.5bn-$4bn over the three years.
The cost reductions will come from four areas: improved risk management and risk culture to cut operational losses, asset sales, greater digitisation and more streamlined distribution and a smaller head office. Mr Rowland added that because large cost plans can be easy to announce but hard to judge, the bank would update the market on progress against targets over the next three years.
“If you look back, Westpac has traditionally targeted cost to income ratios, (but) this time to get the traction that we need, we really want to put in place some specific targets and include those in the scorecards and the performance metrics of our leaders and our teams to make sure that we really do deliver on our commitments this time,” he told Westpac Wire.
The targets include a major decline in products from the bank’s simplification program, dropping from 839 to around 345 by 2024, plus a more than $200 million reduction a year in spending on third parties and contractors and a more than 20 per cent reduction in head office roles and corporate space.
With more customers continuing to do their banking online and via mobile, the bank expects that in three years time mortgages processed on its digital origination platform will grow to 100 per cent as overall customer sales via digital rises to 70 per cent and branch transactions fall by 40 per cent.
The cost reduction plan comes as all banks seek to become more efficient to offset the softer revenue environment, with Westpac’s expenses also being impacted in recent years by elevated risk and compliance spending in the wake of the AUSTRAC case and other matters.
“Over time, the further simplification will mean that we'll have less branches, (but) we'll have different ones. But that will mainly be in the metro areas where we are being more responsive to what our customers want. And we will have a smaller head office over time as we're a much simpler, smaller bank,” Mr Rowland said.
Providing further detail, Mr Rowland said operational losses relating to risk management and risk culture shown as notable items totalled $2.6bn last year and $282m this half. In addition, the Specialist Businesses division – which houses several businesses the bank was intending to sell – accounts for around 8 per cent of the cost base.
More broadly, Mr Rowland said despite the challenges from COVID-19, he was pleased with the first-half result, particularly the increase in return on equity to 10.2 per cent and higher dividend of 58 cents, fully franked and payable 25 June. The bank’s net interest margin rose 6 basis points on the prior six months to 2.09 per cent while the CET1 capital ratio lifted 121 basis points to 12.34 per cent.
Credit quality metrics also improved as the economy recovered faster than expected from the pandemic, stressed exposures to total committed exposures ending the half at 1.60 per cent, down from 1.91 per cent at 30 September 2020.
“We're really pleased with the performance. You've got to remember, we've just come through COVID and I think our teams and our business has come out of that really well,” he said.
“We're starting to see the benefits of a stronger economy flowing from the measures in the stimulus that the government put in place. So in an overall sense, we think we're in a strong position, but there's a lot more to do.”