Westpac turnaround delayed by correction of mortgage process

In a rare bright spot for investors, Westpac will resume paying dividends after deferring and then removing the first half distribution, choosing to pay investors 31 per share, against expectations as low as zero and as high as 35.

UBS analyst Jonathan Mott, who has been optimistic about the prospects for banks given this year’s liquidation, said the result exceeded expectations. after $ 1.2 billion in write-downs were pre-announced last week, although the details show there is still a lot of work to be done.

“Westpac appears to be facing a multi-year history of turnaround,” Mr. Mott said.

The task of getting the bank back on its feet was not made easier by the state’s border closures, with King saying we need to learn to live with the virus.

“We need domestic activity to increase, this is the best thing for the country economically, we cannot keep borrowing money to pay income forever,” King said.

The mortgage book is shrinking

Among the big hand brakes pulled on the bottom line was a shrinking mortgage portfolio. Home loan approvals exploded at Westpac when a the offshore processing center was closed earlier this year in the wake of the pandemic, leaving homebuyers in limbo for up to six weeks before getting a yes or no answer.

Westpac’s new CFO, Michael Rowland, admitted the bank was “too slow” to approve loans and this was impacting market share, causing its portfolio to shrink by $ 8.2 billion. dollars during the year.

“Mortgage growth has been a problem for us this year, we haven’t been following the market,” he said.

The bank has traditionally had high exposure to real estate investors, but weak investor demand, combined with the lengthy approval process, saw its exposure to investor loans drop 4% in the half-year and 7% over the year. year until September. 30.

The bank’s frozen loan portfolio shrinks with the value of deferred home loans to $ 16.6 billion from a high of $ 54.7 billion and deferred business loans dropping from $ 10.1 billion at the top to $ 1 billion as of October 28.

“More than two-thirds of Westpac home loan customers on deferral packages have started repaying again,” King said.

As mortgage clients come out of deferrals, 66% are resuming their repayments, 31% are given a four-month extension, and 3% of loans are in the process of restructuring or experiencing difficulties. By comparison, ANZ said last week 79 percent of mortgage customers were back on full repayments.

“While the lower carryovers are good, many customers will continue to be tough,” King said.

Westpac’s CFO and CEO said after an easing of restrictions, they saw a rebound in loan applications across the board. However, they wanted to see the trend hold before talking about a recovery.

“We saw [approvals] increase in the mortgage market as a whole, and I think it’s very widespread, including signs of additional activity in Victoria, ”King said.

“Our economists are indicating a much better outlook for next year in terms of prices, so we may see a better result.”

Westpac had “a bit of work ahead” of getting “a few days” mortgage approvals for a basic loan, King said. He expects an improvement by the first quarter of the 2021 calendar.

Prepare for a “smoother” 2021

Citi analyst Brendan Sproules said he expected the outcome to be full of “bad news” with low profits and a myriad of legacy issues, but he had put in place the entry into 2021 on a much more solid basis.

“With Peter King’s contract as CEO recently extended, we expect there will be an element of rebasing the cost base and capital to set up a smoother year 2021,” said Mr. Sproules.

“While the 2020 baseline earnings were weak, the company enters 2021 on a much stronger footing and with a number of legacy issues having been addressed, in order to regain lost momentum.”

The poor financial performance led the board of directors to remove short-term bonuses for executives during the year, while the obstacles triggering the payment of long-term incentives were also not met.

The payout of 31 in the second half is a decrease of 61% from the 80 per share paid in the corresponding half of last year, with an annual dividend down 82% from $ 1.74 in 2019. The dividend represents 49% of profits or close to the maximum amount that the prudential regulator will authorize banks to distribute to shareholders.

The dividend will be fully franked and paid on December 18. It will be guaranteed by a dividend reinvestment plan which will offer a 1.5% discount on the average price over 15 days from November 17. was a fundraiser in disguise.

At the divisional level, the numbers were grim. Consumer bank cash profits fell 12% to $ 2.7 billion as provisions for customer indemnification payments nibbled on income and mortgage processing time problems persisted .

Merchant bank profits fell 62 percent to $ 734 million; New Zealand company’s profits fell 38 percent to $ 649 million; and institutional banking profits fell 64 percent to $ 332 million.

The bank was quick to say that much of the slump in performance was due to “our own problems,” including the growing bill for customer remediation, legal fees, and the additional $ 415 million that was incurred. she needed to recover to pay AUSTRAC $ 1.3 billion and settle the case.

“This is a disappointing result and while COVID has played a role, our own issues have had a significant impact on profits and performance,” Mr. Rowland said.

About Timothy Cheatham

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