Westpac Banking : WBC 1Q22 update transcript (PDF 161KB)

Westpac Banking Corporation

1Q22 Update

Thursday, 3rd February 2022

Peter King, CEO

Michael Rowland, CFO

Andrew Bowden, Head of Investor Relations

Andrew Bowden:

Good morning, and welcome to Westpac's first quarter 2022 conference call. My name is Andrew Bowden, and I'm Head of Westpac's Investor Relations. Joining me are our CEO, Peter King, and our CFO, Michael Rowland.

We've lodged four documents with the ASX this morning.

1. A release explaining the results for the first quarter '22;
2. a slide pack with additional detail on the result, along with some information on asset quality and capital;
3. Our normal Pillar 3 Report for the December quarter; and
4. an announcement on changes to our organisational structure.

If you haven't already, I'd encourage you to have copies of these releases handy. They've been lodged with the ASX and they're also available on our website.

I'll now hand over to Peter and Michael to make some opening remarks and then we'll invite some questions. Thank you.

Peter King

Thank you Andrew and good morning everyone, and thanks for joining us. Conditions have certainly remained fluid since our full-year results last November. Given the buyback and COVID developments over the summer we decided to hold a call and provide some detail on our performance and the key trends we're seeing. Importantly, we don't expect to continue quarterly earnings calls going forward.

If I turn to the first quarter, I'm pleased with the progress we're making on our strategic and transformation agenda. In particular, our CORE (Customer and Risk Excellence) program has moved from its design phase to the implementation phase, and that will drive further improvement in our risk management.

The exit of non-core businesses is going to plan, and we're now focussed on super and platforms as the next businesses to exit.

We're also making progress on our cost reset program.

It's been a solid start to the year with our first quarter highlights including:

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• Cash earnings up to 74%, where excluding notable items cash earnings rose 1%.
• The balance sheet is strong with capital well above APRA's benchmark.
• Funding and liquidity is in good shape, while
• Asset quality again improved. In fact, business stress is now lower than where it was at the start of COVID.

We also grew our loan portfolio in the priority areas of mortgages and business in Australia and New Zealand and made good progress on costs, which were down 7% this quarter.

While we started well, particularly in treasury, margins remained under pressure from low interest rates, competition, continued flow of mortgages into fixed rates, and the need to significantly lift liquid assets.

Just as a reminder, there is a major reshape of the Bank's balance sheet going on. The committed liquidity facility runs down to zero this year, and we responded by increasing liquid assets by $29 billion this quarter.

Given these NIM trends, delivering our cost reset is critical, so today we also announced the next phase of organisational changes that build on our lines of business model and assist deliver head office efficiencies.

As a reminder, we first implemented our lines of business operating model in 2020 and it has created businesses responsible for our major customer offerings, such as mortgages. The model has established end to end accountability, helped speed up decision making and shift decision making closer to the customer.

Today's changes take this model a step further by moving more support functions such as finance and IT closer to the business and delivers a leaner and more focussed head office.

As part of the change, we're also combining our risk, financial crime, and compliance activities back under the Chief Risk Officer. You will have seen that we have appointed Ryan Zanin as the Group's Chief Risk Officer.

Ryan is a seasoned risk executive, beginning his career in Canada before taking on larger risk roles in GE, Wells Fargo, and most recently at Fannie Mae.

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David Stephen and Les Vance who lead our risk and financial crime and compliance functions now will be leaving the Bank during the course of this year.

Among other changes, Scott Collary will take on the role of Group Executive, Customer Services and Technology. Scott will look after all those service activities linked to customers.

Carolyn McCann takes on the role as Group Executive, Corporate Services, principally all our corporate activities such as property, corporate affairs, and sustainability along with shared services for HR and finance.

With those comments I'll hand to Michael to touch on the quarter.

Michael Rowland:

Thanks Peter, and good morning. This quarter core earnings were $1.58 billion, well up on the quarterly average of the last half. Excluding notable items, cash earnings were up 1% from lower costs and a stronger treasury and markets' performance.

These gains enabled us to absorb the loss of earnings from the sale of our general insurance and LMI businesses, along with a turnaround in impairment charges.

We grew mortgages and business lending by $5 billion, with a strong contribution from institutional banking. New Zealand also grew, but the appreciation of the Australian dollar reduced this impact on the Group's results.

You may also recall that we completed the sale of our wholesale dealer book in December, and that reduced business lending by around $1 billion.

We are pleased with the growth in mortgages in the owner-occupied segment, following improvements we've made in operational and credit processes.

Margins were down eight basis points over the quarter of which six basis points was due to the increase in liquid assets. We've largely completed the increase in holdings of high-quality liquid assets for the rundown of the CLF with only a small additional impact expected in the second quarter.

The margin, excluding treasury and markets, was 167 basis points for December, down around 13 basis points from the September '21 margin. Excluding liquids, the margin decline was due to the continuing industry and

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dynamic of low interest rates, steepening wholesale yield curves, customer demand for lower margin fixed rate lending, and stiff competition. These pressures are expected to continue over 2022.

Cost reduction was a feature of the result as we've begun to deliver on the plans, we set out last year. Headcount, a combination of staff and third-party contractors, declined by over 1,100 in the quarter. Most of the savings were from the simplification of our functions, reductions from selling businesses, and automation. We've more gains to come from completing our fix priority and from the organisational changes announced today.

Importantly, we've improved efficiency while investing in our franchise. We've increased banker numbers without pulling back on our program to materially lift our risk management capability.

Credit quality continues to be in good shape and while some customers are having difficulty, the numbers are small. Stressed assets are now back to pre- COVID levels and delinquencies in both mortgages and unsecured credit have continued to decline.

In usual circumstances these trends would have led to a credit impairment benefit, but we felt given current uncertainties it was prudent to use our judgement to increase overlays and put more weight to the downside economic scenario. These judgements added $551 million to provisions, more than offsetting underlying declines.

Total provisions were still $241 million lower, but that was entirely due to the write-off of almost $300 million in impaired assets.

The CET1 ratio was a strong 12.2% and even after the expected impact of the buyback our CET1 ratio will be comfortably above 11%.

Funding and liquidity have also been strong. The customer deposit to loan ratio is now up over 83%, while our liquidity ratios are well above minimums and buffers.

While we've much to do in the year ahead, we've made a solid start and have put in place a number of measures to continue that trend particularly on costs. With that, let me hand back to Andrew for questions.

Andrew Bowden:

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