Market bets Westpac won't hit cost target
Market bets Westpac won't hit cost target - Financial Review, 11/3/2021
Westpac's ambitious plan to slash its annual operating costs from a bloated $13.3 billion to $8 billion in just three…
On November 3, Westpac's market value has slumped by about $10 billion in two days, with the surge in ongoing costs by 7.5% in the announcement of the full-year results on Monday.
In 2021, Westpac had the one-off costs at $4.2 billion. The significant one is the $2.3 billion notable items in selling insurance and Asian assets to simplify the bank, fixing its compliance systems and compensating customers after the Hayne royal commission. The bank also spent $800 million to exit its superannuation and platforms businesses and $1.1 billion to digitise and rationalise its range of products. In addition, it brought on more than 3000 new staff to resolve risk management problems. However, Westpac is betting that these additional risks and compliance costs won't repeat and assuring efforts to reduce the cost of delivering mortgages to customers by digitisation. With their three-year plan, the annual operating costs would drop from $13.3 billion in FY2021 to $8 billion in FY2024, with the starting point of $9.1 billion as an "ongoing" cost base for the year to September 30 2021. The $1.1 billion in "Fix" project costs would phase out in two years as they are the temporary expansion in the workforce to resolve historical issues.
But analysts weren't buying it. Morgan Stanley downgraded Westpac and explained that with the confusion in the 131-slide deck, they have less confidence in the bank's ability to deliver on cost reductions and the "Fix" project has a more significant impact on profitability in the longer term. They also forecast the expenses in 2022 with a 5% increase and ongoing challenges coming from "strategic inertia, weak franchise momentum, an incomplete integration of St George Bank, ineffective cost control, inadequate risk culture and governance, and sub-optimal capital management".