Westpac chief financial officer Michael Rowland says the bank remains on track to hit its target of an $8 billion cost base by 2024, despite a jump in expenses as the bank brought on more people to improve risk management and handle COVID-related issues.
Speaking as he and chief Peter King handed down full-year 2021 results, Mr Rowland said that as flagged, costs increased in the second half due to higher spending on the bank’s “fix” priority “to set us up for the future”.
“That's been the key driver of cost increases in the half. We’ve put on more workforce to get through the work we need to do now. And in addition, historically, our investment spend is higher in the second half than in the first half and that's played out again this year,” he told Westpac Wire.
“Also, one of the new aspects is that with the COVID lockdowns, fewer people have taken annual leave in the recent in the half and as a result, our annual leave liability built up. So, we expect that to normalise as the economy reopens.
“The plans we have in place to get to our $8bn cost base remain relevant and appropriate. We have clear plans over the next three years to deliver that cost base. And that hasn't changed. So, everything is as we expected and we're on that trajectory for that lower cost base in 2024.”
For the year to September 30, costs jumped 22 per cent in the second half and 5 per cent over the year to $13.3bn. Cash earnings lifted 105 per cent to $5.35bn on lower notable items and a $590 million impairment benefit.
Mr Rowland said the benefit was driven by the economy faring better than expected this time last year, with COVID loan repayment deferrals about 10 per cent of the peak level.
“I think broadly, both consumers and business have weathered difficult economic conditions well, and therefore we're not really seeing any significant deterioration in the portfolio. In fact, we're seeing a lot of pockets of better performance, and that's obviously flowed through to create better credit impairments,” he said.
“We are still cautious, we haven't seen the full opening up of the economy…but at this point, we are quite positive and we don't see any particular concerns going into 2022.”
On the decline in the net interest margin over the year to 2.04 per cent, Mr Rowland said competition for mortgage and business lending had taken its toll, along with low interest rates generally. In addition, he said the decline in NIM was higher in the second half due to fewer opportunities to reprice deposits and the faster growth we’ve seen in lending.
However, low overall wholesale funding costs had provided some benefit, and Mr Rowland said an environment of rising interest rates in coming years – if it eventuated – would be helpful.
“We do expect rates to rise. I think the big question at the moment is when will that be? We've got the RBA that's indicated that rates won't rise till 2024. We've got Bill Evans, who is obviously a highly respected economist, saying 2023. But we've got the market betting 2022,” he said.
“So, I'm not going to pick when it'll happen. But yes, I think we'll acknowledge that rates will rise and in the longer term, that will be a benefit to the bank.”