Westpac’s microscopically higher full-year result this week rounds out the major banks’ reporting and, while they’re all fessing up to major fallout from the Royal Commission and the increasing costs of their funding, it’s not been so disastrous for the banks in general and Westpac in particular, once you pick through the numbers.
You can almost hear the sighs of relief when the bank’s bean counters were able to announce a cash net operating profit of $8.07 billion, just a cigarette paper ahead of the 2016-7 year number of $8.06 billion.
Statutory profit lifted by more than 1% to $8.095 billion, while cash earnings dropped 1%. The reported 13% return on equity (ROE) came out at the bottom end of Westpac’s target range.
Far be it from me to suggest they were raiding hollow logs, but everyone knows there’s a degree of flexibility built into those piles of numbers that carry so many zeroes behind them.
That makes Westpac the only big bank this year to come out ahead of its 2106-7 year results.
Not only that, but it ended up winning the “my remediation bill is smaller than yours” competition.
There had been a slight wobble last week when it revealed the remediation bill would be $281 million, rather than a previously announced $235 million, but that came up looking shiny, compared with NAB’s $360 million, ANZ’s $421 million and CBA’s eye watering $1.1 billion, announced back on August 8 when our biggest bank reported on its June 30 numbers.
Bear in mind that CBA had to pay a $700 million civil penalty to settle that money laundering case involving the supposedly clever “Intelligent ATMs”.
My spies tell me that Westpac also started using Intelligent ATMs just after CBA did but instead of allowing a maximum limit per deposit of $20,000, as CBA did in breach of the Austrac $10,000 per transaction reporting requirements. Westpac decided to play safe and limit deposits to a maximum of $10,000.
Conclusion? Westpac’s management dodged a very nasty bullet on that one. By not being the first mover, as CBA was, and by hanging back on the deposit limit, Westpac came up smelling of roses.
Think about it from the money launderer’s point of view. Let’s say you have $100,000 in cash to launder. Would you have preferred to do five deposits at a CBA machine, or 10 deposits at a Westpac machine? I rest my case.
Mr Hartzer is not surprisingly making a virtue of caution, noting that the $281 million set aside for remediation may not be the end of the blowback from the Royal Commission.
“We’re committed to running our business in a way that meets standards from customers and the community and we’ll continue to look to improve things,” he said, saying a lot and not much.
But then he added, “I’d like to say we’re largely through it but it is possible there may be other issues.”
Most of the commentary on the banks has been understandably bleak, given that house prices are moving south, wages are static, the cost of funds has moved up and there are still items of toilet furniture dropping from the sky.
But let’s just have a look at that $281 million, nasty as it is, in perspective.
It represents 3.4% of Westpac’s net profit number for one financial year, and in this instance we know the remediation covers a number of previous years, so you could easily argue it costs the bank less than 1% of net profit per year. In revenue terms, it’s a rounding error.
Even if Westpac has to keep paying out the same amount again in the future, it’s not a serious issue.
That’s not to play down what’s happened in the advice world, particularly as Westpac is the only big bank that wants to hold on to its main wealth business, in this case, BT Financial.
A statement accompanying the result reads: “The royal commission has been a valuable and rigorous process.’’
“The stories and examples of poor behaviour affecting customers that have come to light are confronting and have understandably impacted the public’s trust in the industry.”
The irony that many observers may not have spotted is that the big banks wanted out of advice because, quite apart from the reputational grief, they couldn’t generate a Return on Equity (ROE) from their wealth business that was as good as the 15 per cent plus they were getting from their conventional lending business.
And now their overall ROE has come down, in Westpac’s case to 13%.
And it’s one of the better ones. Some toilers at KPMG have run an analysis of all the bank results and found the average ROE among the big banks is now 12.5%, a worrying 134 basis points or 1.34% below the previous equivalent numbers.
The KPMG report notes that the big banks’ cash profit after tax from continuing operations was down 5.5% overall, year on year, at $29.5 billion.
That is a very big headline number but wait for this. Their net interest margin, that critical measure of the cost of “money in” versus the earnings of “money out”, fell by only one basis point, or 1% of 1%.
There are a few more numbers in the report that indicate that our banking system isn’t exactly on the ropes.
One is that the big banks’ net interest income grew by 2.2% to $62.7 billion for the full year, hugely offsetting the 3.7% drop in non-interest income to $22.4 billion.
That means their core business, lending, did very nicely thank you, despite the highly publicised removal of some fees, such as ATM fees.
Oh, and bad and doubtful debts? Their aggregate charge for bad and doubtful debts actually came down by $702 million to $3.3 billion, a drop of 17%.
While there are lots of reasons to talk about reputational damage in the banking sector, don’t let yourselves be carried away by any thought that the industry is in any kind of financial jam. It isn’t.
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