Westpac’s full-year profit will take a $1.3 billion hit due to heavy write-downs as it shrinks its institutional bank and takes additional provisions for potential legal action and customer remediation after the royal commission.
Westpac has also flagged a potential new regulatory issue in the life insurance business it sold to TAL for $900 million in August relating to the disclosure of premium increases that is in the early stages of investigation.
In an indication Westpac is keen to resolve future regulatory cases relating to misconduct identified by the Hayne inquiry, it said it has added new provisions for “litigation matters, including to resolve outstanding investigations should a regulator decide to bring civil penalty proceedings”.
Ahead of its full-year results release on November 1, Westpac said its institutional division, which has been reducing its footprint in Asia, would write down $965 million, including goodwill and capitalised software, in the second half.
Revealing the ongoing cost of its complex clean-up operation, much of this amount relates to the costs of shrinking the business in China and Hong Kong, and the exit of energy trading, as Westpac consolidates operations into Singapore. The reduction was made after the bank conducted an annual impairment test and found the carrying value of mostly intangible assets was too high.
“Over the last year we have simplified and reduced risk in WIB through exiting energy trading, consolidating our Asian offices and reducing our correspondent banking relationships. While these actions have reduced risk in WIB, they have also reduced revenue,” Westpac CEO Peter King said in a communication to staff sent after the write-down was announced to the market.
“Making WIB a simpler and stronger business sets us up for success as market conditions improve. The write-down has no impact on our business or customers,” Mr King said.
But Westpac also flagged tougher operating conditions in the institutional bank. “At the same time, medium term expectations of a prolonged low interest rate environment, subdued financial markets income and elevated compliance expenses have impacted WIB’s earnings outlook,” Westpac said.
Westpac said its write-downs would reduce its common equity tier 1 (CET1) capital ratio by 15 basis points, which will raise some questions about whether the second half-dividend might be pared back slightly when the bank announces its full-year results.
Westpac shares opened down by 1 per cent, more than double the fall at the other major banks. After 10 minutes of trading on Tuesday morning they were 28¢ lower at $25.78.
The market was expecting Westpac to report a full-year cash profit of around $6.5 billion, so the size of the writedown announced on Tuesday reflects 20 per cent of this amount. For the full 2020 year, Westpac reported cash profit of $2.6 billion, which also suffered from substantial writedowns.