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Being the first bank and the oldest company in a country raises the level of expectations of the stakeholders. Bushfires, droughts, floods or climate change, no matter what the challenges are, the organisation is expected to show generosity at every turn.
Oldest bank of the country on a transition to supremacy?
Towards the end of 2019, the unfolding of events at Westpac Banking Corporation (ASX:WBC) took a toll on shareholders returns, and serious concerns were raised on the operational ethics of the group. As a result, the bank’s Chief Executive Officer had to resign on an immediate basis.
The 2019 Annual General Meeting of the bank was quite a daunting show, and the Board of the bank faced detrimental consequences, as there was nothing but disappointment. Westpac’s Board escaped a spill motion against the Board with less than 9% voting for the extraordinary general meeting, following a second strike on the remuneration report.
Related read: The tale of Westpac Share Price; WBC Yielding 7.1%
Investors and shareholders were concerned about the bank, but it had not been just Westpac, the scenes of Annual General Meetings across major banks were quite intriguing. Westpac’s shareholders were raising strong voices concerning issues including AUSTRAC disclosures, climate change, and ex-CEO’s remuneration.
The magnitude of the issues had been quite drastic, a level that saw Westpac’s Chairman preponing his retirement in an effort to please the stakeholders. Nonetheless, the replacement is a promising one.
McFarlane was ‘battle-hardened’ at the time appointment
When John McFarlane took over the bank, it gave a strong signal to the alleys of the markets that the incumbent people behind the bank are taking the concerns seriously. And, we must show gratitude to the outgoing Chairman – Lindsay Maxsted, who was able to get a replacement like Mr McFarlane.
Mr McFarlane, a Scotland-born banking and financial services veteran, has been known for his crisis management and transformational skills in the industry, having demonstrated these capabilities in his previous stints with RBS, Barclays and Aviva.
In a long and illustrious career, Mr McFarlane has held the position of Chief Operating Officer of the Australia & New Zealand Ltd (ASX:ANZ) for a period of ten long years between 1997 to 2007. That said, it would be quite interesting to witness him onboarding a new CEO and drive the first bank of the country out of its predicament.
However, it is not going to an easy road as the executions have to be on point in a bid to expect favourable results. In the near to medium term, the bank would continue to face legal hurdles like class actions, proceedings, and fines, among others.
Interestingly, companies like IMF Bentham (ASX:IMF) are thriving by funding such cases, and thus Westpac’s situation has provided immense opportunities for companies running such business models.
It is not just the banking companies that are exposed to the shocks of long-lasting class actions and court cases, the risks have also been felt by retailers that have been accused of underpaying team members. Some retailers have even received class action notices.
In markets and businesses, the litigations and class actions go hand in hand. That said, the companies continue to operate their respective businesses, and such cases have no defined time limits. One such example is the case of Macquarie Group (ASX:MQG) that has been battling with court cases since 2011.
In light of this, companies usually keep aside provisions to deal with any such potential threats to the financial health that are contingent.
Westpac closes half-year on 31 March
Fundamentals of the bank were looking quite positive until recently, before a sharp sell-off that started this week, thereby wiping billions of dollars of wealth and sending the safe-haven assets, including sovereign debt to sky-high levels.
As a result, the yields on domestic sovereign debt had trended close to record lows, while the shares of Westpac lost ground for the fourth consecutive day on Thursday, 27 February 2020. The dividend yield was around 7.15%.
In the first-quarter ended 31 December 2019, the bank’s APRA Level 2 common equity tier 1 capital ratio was 10.8%, showing an improvement 0.1 ppts sequentially. This 0.1 ppts move was on the back of movements due to $2.8 billion equity capital raising, dividends, adjustments in risk-weighted assets, and first-quarter earnings.
WBC’s level 1 common equity tier 1 capital ratio was 11.1% at the end of the period, showing an improvement of 0.1 ppts sequentially. The bank noted that the credit quality remains sound.
The bank’s impaired assets were $1.8 billion at 31 December 2019, flat on the previous quarter. The stressed assets to total committed exposure rose two basis points to 1.22 per cent, owing to an increase in customer downgrades in Institutional Bank, business and NZ, which was offset by a decrease in substandard facilities from customer upgrades.
Related read: An Extensive Banking Sector Analysis with Big Four Under Spotlight
WBC’s domestic unsecured 90+ day mortgage delinquencies were higher by five basis points to 1.82%, primarily due to a $300 million decline in the portfolio. WBC’s total provision balance ended 1.7% higher, with full provisions to gross loans up one basis points
Meanwhile, the Australian 90+ day mortgage delinquencies were at 0.86% down by two basis points from the previous quarter. The properties in possession were at 472, down by 86 on the last quarter, owing to improving housing conditions and seasonality.
As a result of bushfires, the bank said that the credit quality has remained steady with a small impact. However, the cost of insurance claims related to severe weather was estimated at $140 million in the period to 14 February 2020.
Since the full-year results disclosure, there have been numerous developments that would impact the bank’s earnings in FY20. It was noted that the unprecedented bushfires across the country, as well as high-storm activity, would impact earnings.
Westpac expects that AUSTRAC claims, the response plan, class actions, and actions from other regulators would also affect earnings. Besides, the bank believes that bushfires, storms, coronavirus are likely to impact economic activities in the country, thereby affecting banking and growth potential.
On 28 February 2020, WBC last traded at $23.700, a decline of 2.589% from the previous close. The stock has generated returns of -0.80% and -10.72% in the last three months and last six months, respectively.
Is there light at the end of the tunnel?
The bank has had a difficult last couple of months with WBC being the worst performer among the big four banks of Australia in the previous six months. While the issues are still ongoing, there could be a ray of hope for the stakeholders.
Experts believe that the appointment of a new Chairman and the imminent announcement of a new CEO could potentially steer the bank in the right direction. Even though the impact of AUSTRAC penalty is likely to be significant, it is not expected to have a long-term effect on the bank giving a sign than things could around for the bank.
