Westpac Banking Corporation

Good morning, everyone, and welcome to the presentation of Westpac's full year 2020 results. My name is Andrew Bowden, and I'm Head of Investor Relations. I'd like to acknowledge the traditional owners of the land on which we speak, the Gadigal people of the Eora Nation, and pay my respects to elders past, present, and emerging. Presenting today are our results is Peter King, our CEO, and our new CFO, Michael Rowland. So without further ado, I'm going to hand over to Peter. Thanks, Peter.

Well, good morning, and thanks for joining us. 2020 has certainly been one of the more challenging years for the country and the bank. And I'm really mindful of the impact it's had on our people and customers. We've had to deal with our own issues as well as the impacts of COVID. And our results were disappointing. However, there's some positive signs in the economy and with customers rolling off deferrals. I'm pleased with our balance sheet, which is in great shape across funding and capital. This provides us flexibility to support customers doing it tough. Customers will experience ongoing impacts from COVID into next year, so we've added significant resources to help us get the best outcomes. While there's much to do to fix our issues and restore performance, we've sharpened the strategy, refreshed the executive team and we're committed to delivery. Today I'll cover the result. on strategy and priorities before handing over to Michael to take you through the detail. So let's turn to the overview. Our earnings were disappointing with impairment charges and notables impacting this result. Impairment charges increased fourfold to $3.2 billion. The impairment charge was skewed to the first half as there was no significant changes in scenario weightings. or economic forecasts in the second half. The other negative was the 2.6 being charged for notable items. This includes the AUSTRAC matter and programs to address issues and simplify the business. I'm very pleased with our capital position, with the set one ratio ending at 11.1%, and this increases to 11.2% on a pro forma basis, allowing for announced asset sales. Another feature of the year is a large increase in credit provision coverage with the ratio now at 171 basis points. On mortgage and small business deferrals, there's been significant reductions in customers on packages. On strategy, I've now completed the reset of the strategy with the board and this includes a clearer purpose, sharpening the focus on markets and businesses we're in, and setting out the three priorities for the company. One of my goals in this reset was to keep it simple and also provide clear actions and that's seen as frame the priorities as fix, simplify and perform. This has been translated into a program with individual executives accountable for delivery. And turning to the result, it was a tough year. with a reported net profit of $2.3 billion down by two thirds. Cash earnings trends were similar with the main difference to the statutory result being revaluation losses on hedges that don't qualify for hedge accounting. Impairment charges equated to 45 basis points of loans up from the 10 to 15 basis points we've seen in recent years. This saw us add $2.2 billion to impairment provisions, with the total provision now at $6.2 billion. On dividends, we declared a final dividend of 31 cents, which is a 49% payout of our full year statutory result. This is the maximum dividend we could pay under current APRA guidance. The bottom table is the result excluding notable items. On this basis, Core earnings was down 11% over the year, mostly from a fall in wealth and insurance earnings and higher expenses as we increased resources in risk management and to handle COVID demands. Also excluding notables, the cash earnings reduction was a third with the ROE at 7.7%. If I move to divisions, we're reporting under the new structure we announced at the half. In consumer, the decline in earnings was mostly due to higher impairments, but expenses also rose as we responded to COVID and risk management demands. Margins were well managed, driving net interest income growth, while fee income fell from lower customer activity, particularly in credit cards. This year we have wrestled with challenges in mortgage processing. This reflects losing our offshore operations as a result of COVID, and making our assessment processes too complex. The top priority for the mortgage line of business is to fix this and we expect to see improved performance early next year. In business, the decline in cash earnings was mostly due to higher impairment charges and lower margins as deposit spreads impacted lower interest rates. Fees were down off the back of COVID packages and lower activity. WIB's lower earnings also reflected a large increase in impairments, while loans reduced as we focused on return. Margins were impacted by deposit spreads. Costs were higher from increased spend on risk matters, whilst markets income held up particularly well. New Zealand's results were lower due to higher impairment charges. I was pleased with their operational performance with growth in both mortgages and businesses. helping to offset the decline in margins. Our specialist division houses the wealth, insurance, auto finance and Westpac Pacific businesses. And the loss here reflects a large charge of $922 million for notables, including write-downs in insurance and auto, and the accounting loss on vendor finance business. Excluding notables, earnings were also lower from higher general insurance claims and a decline in wealth earnings from lower funds and tighter platform margins. Impairment charges were also higher in both Auto and Westpac Pacific. Group businesses include Treasury and the AUSTRAC related costs and the loss here reflects the AUSTRAC provisions. Excluding notables, group businesses made $151 million with Treasury the highlight, delivering a great year with the team positioning well for lower interest rates and credit card spread movements. So overall impairments impacted all divisions with notable items particularly impacting specialists and group businesses. On asset quality, this is the trend of stressed exposures to total exposure. As you would expect and in line with the weaker economy, asset quality deteriorated, although the pace of deterioration was better than our earlier expectations. The other key point is stress remains well below the GFC peak. We spent considerable effort reviewing high-risk accounts in the business portfolio. This includes the majority of high-risk exposures in WIB and Business Bank. The downgrades from these reviews drove the 23 basis point increase in watch list and substandard and that's the red part of this bar. On delinquencies, recent trends saw a stabilisation as less people moved into hardship arrangements. I do expect this trend to continue for a few more months before we see customers rolling off packages and into individual hardship arrangements. We've seen very good progress on the number of customers now making repayments. In Australian mortgages deferrals have reduced to 4% of the portfolio while in small business it's 2% of the portfolio. We're closely tracking whether customers make their first repayment and we saw around 97% of the Australian Mortgage Book do so. We'll have a better idea on small business deferrals in a month's time given we're now at the end of the original six-month packages. The right-hand chart shows the quarterly trend in impairment charges and the coverage ratio. It highlights the coverage ratio lifted materially to 171 basis points. While the fourth quarter impairment charge was modest, provisioning coverage was maintained. COVID has had a significant impact on credit quality and customers. However, it's clear the measures provided by the government have been very effective and our own efforts in supporting customers have been important and will continue. Moving to capital, the CHC1 ratio ended at 11.13%. Boosting the ratio was a company priority so this is a good outcome and the result reflects lower capital usage in our core businesses and releasing capital from low return areas. On dividend, we declared a 31 cent dividend which reflects APRA's guidance of only paying half of statutory profit. While conditions have improved, we've also decided to be conservative and underwrite the DRP so the dividend payment won't have an impact on the capital ratio. We also have options to further improve our capital position The zip sale increases the ratio by eight basis points. Well, our line of businesses also have a focus on capital efficiency. So overall, I feel well positioned on capital. And since becoming CEO, my first priority has been to reset our strategy. Our purpose is to help Australians and New Zealanders succeed and helping is what our people are passionate about. As a result, we're focusing on our core businesses in Australia and New Zealand. In recent weeks we've announced the consolidation of our international operations and we use our hubs in Singapore, London and New York to support domestic customers doing business offshore. In terms of markets, we're concentrating on banking and more specifically where we can build a sustainable advantage. This thinking drove the creation of our specialist division and we're making good progress. We've also reset our priorities to be simple and clear and this will help with execution as everyone in the company lines up behind them. The first is fix. We need to fix our issues so we can move forward and it's my number one priority. We're addressing our risk management capability, improving culture, accelerating customer remediation and reducing IT complexity. Second is the need to simplify and this includes exiting non-core businesses and simplifying the products and services we offer. Over many years we've added new products and features which has added unnecessary complexity. We've also adopted a new line of business operating model and this sees one person responsible for the end-to-end product or service. This approach improves decision-making and accountability. It will also deliver better customer outcomes when one person has a clear line of sight and authority across every step in our service chain. At the same time, we need to transform our processes using digital, removing manual steps and using data to improve how we operate. The third priority is to perform. This season is focused on delivering for customers, growing our business and improving returns for shareholders. Finally, it's our customers and people that are at the heart of our business and having a highly engaged workforce will deliver value and I will not lose sight of that. As part of our change, I'm very focused on driving outcomes and while there's a lot to do, we are making progress. This slide is a snapshot of what we've delivered this year. As you may expect, I've moved quickly to get the team in place. We now have our CFO, Head of WIB and Chief Operating Officer on board and the Head of Consumer starts in January. In my first six months, I've spent considerable time on resolving key issues. Settling the Austrac case was important as it means we are solely focused on lifting our financial crime and risk capabilities. Part of the change required is cultural and that saw us reset our values and behaviours. In addition, our new core program is focused on improving our risk culture and risk management capabilities. This year we also completed our five-year IT infrastructure refresh and that's driven a 56% reduction in system outages this year and nearly 90% reduction over the five years. As part of this, the move to Microsoft 365 also allowed us to have 22,000 people working from home. In terms of Simplify, our specialist business is up and running and we're progressing the exit path for all the businesses. On Perform, our focus was managing the COVID impacts on both customers and the balance sheet, boosting the C to 1 ratio and ensuring the mortgage line of business was well set up to turn around our performance there. If I turn to 2021, we're focusing on driving outcomes and this slide has our priorities. On six, we'll focus on risk management, particularly the financial crime and call programs. These are well underway with reducing correspondent banks and major deliverable early next year. On fixing technology, we're nowhere too complex. We've made progress on infrastructure over recent years and we're now finalising our multi-year domain roadmaps. Under Simplify, the focus is exiting the specialist businesses, rolling out the customer service hub to all first and third party channels and embedding the lines of business operating model. On Perform, we're targeting significant improvement in mortgage growth. And as we move through COVID, balance sheet strength remains a focus so we can continue to help customers. Finally, we'll come back to you with a three-year cost plan at the half. Thanks, and let me introduce Michael Rowland, who joined us recently and brings fresh perspectives to the company.

Thank you, Peter. Good morning, and let me add my thanks to those listening. I'm really pleased to be with you today. I come to Westpac with an understanding of the industry the bank, its performance and what's ahead. It's been a challenging year, but I'm encouraged by our progress on resetting the business and with the strength of our balance sheet, particularly capital. Nevertheless, there is much to do to improve performance and returns and that will be my focus in the year ahead. When I look at the result, I'd make three points. First, as Peter said, this is a disappointing result and while COVID has played a big part, our own issues have significantly impacted profit and return. Second, we've maintained a prudent approach to credit provisioning and our coverage ratios reflect this. Finally, we strengthen capital and are well-funded and liquid. Together, these put us in good shape to deal with the current environment and continue supporting customers. So let's turn to the details. Cash earnings increased 63% in the half and excluding notable items was up 19% from lower impairment charges. This half, COVID has impacted most line items. Removing the impact of notable items, net interest income was down with both lending and margins lower. Non-interest income was flat with lower fees and wealth income largely offset by higher general insurance income. Costs were higher. as we prioritised supporting customers and increased our investment in risk capability and systems. We again topped up the credit provisions in the second half, but given the big provisions in the first half and our decision to leave risk scenario weightings unchanged, the second half charge was significantly lower. Our effective tax rate remained high at 42% as the AUSTRAC penalty provision and goodwill write-downs are not tax deductible. The effective tax rate for the year was 45%. Given the impact of notable items, I would like to explain these in more detail. Notables had a $1.2 billion impact on cash earnings this half. Previously, we've also disclosed other volatile items, but these have not had a major impact in recent halves. At the top of the list is the AUSTRAC penalty, which we settled recently. Remediation and litigation costs remained high at $182 million as we moved to resolve known issues. Remediation provisions were mostly top-ups to existing matters while we also increased program costs as we seek to make payments faster. Litigation costs were largely settlement costs of matters that we have closed out. We've had a good look at the value of each of our businesses and the combination of business and market impacts has meant that we've written off all of the goodwill of our life insurance and auto businesses. We also wrote off some capitalised software for systems that were no longer in use. Asset sales and revaluations were $55 million with two larger losses. As we announced last week, we recognised losses in the life company and the loss on sale of the asset finance business. These offset again on Zip. The sale of Zip has released eight basis points of capital, which adds to balance sheet strength, so let's look at that. The changes in the balance sheet have been substantial in the half. CET1 ended the year above 11%, while our LCR and NSFR jumped from significant deposit flows, the term funding facility and more liquid assets. With customer deposits up 2% and lending 4% lower, the deposit to loan ratio has increased to over 80%. On lending, declines have been seen in Australia with some growth in New Zealand. Following our strategic decision to rebalance our portfolio, lending also declined in international. A lift in deposits and $18 billion from the TFF have meant we have not needed to access term wholesale markets and we've reduced our short-term balances. As a result, wholesale funding is $42 billion lower with much of the reduction in offshore funding. Now let me turn to mortgages. Mortgage growth has been a problem for us this year. We've not kept up with the market. You can see that in the top left where mortgages have contracted in the last two halves. When you look into the detail on the bottom left, this decline has been due to property sales and pay downs. Part of this can be explained by the composition of our book and our overweight position in investor lending. This sector has contracted over the last 18 months with investors tending to pay down faster. You can see that in the table on the top right. While this is part of the story, our decline in mortgages has also been due to our process issues and our share of new lending. We know our time to write is too slow. Our new mortgage line of business management are working through the improvements across systems, policies and processes to get us back in the market. While we have recently seen a rise in daily applications, we need sustained improvement before we can call a turnaround. Interest only lending is falling with balances down almost $14 billion in the half and are now around 21% of the book. Low interest rates are also seeing customers looking around more, translating to increased refinancing with a preference towards fixed rate loans. Low rates are impacting margins, so let's turn to that. Margins were down 12 basis points. Loans had little net impact with competition, mix and COVID pricing, largely offsetting the benefit of lower rates. Much of the competition has been in mortgages where we've seen four basis points of contraction from front book, back book pressure. The seven basis points deposit impact was mostly about low rate deposits, partially offset by a mid-shift away from more expensive term deposits as you can see in the chart in the bottom row. On the right, deposits earning less than 25 basis points have increased $36 billion over the half. On the positive, short-term wholesale funding and treasury and markets contributed five basis points and one basis point respectively. Liquidity was also a seven basis points drag through a combination of mix and low rates, while capital was a three basis points drag and mostly about the returns from the tractor on the bottom left. The bulk of this impact should come through in the next 24 months. This half, non-interest income was flat, excluding notable items. Fee income was 9% lower, primarily due to the impacts of COVID. This included lower earnings on cards as activity fell significantly and customers were unable to travel overseas. Other fees were also lower due to lower volumes and fee waivers. Funds income has continued to decline due to lower margins and a decline in average FUA. Insurance revenue increased due to a reduction in insurance claims. The trading in other category was up 2%. Underlying performance was broadly flat as higher fixed income trading was offset by lower income from commodity trading. However, the second half result benefited from a positive CVA movement as credit spreads narrowed. Notable items have remained elevated and have had a large impact on expenses this half. Excluding these, costs were up 7% as we supported customers through COVID and invested in enhancing our risk and compliance capability. Moving across the buckets from left to right, our productivity savings of $232 million more than offset business as usual cost increases and higher investment, including amortisation. We've continued to strengthen our management of risk and increased our spend by $226 million. This included adding over 400 resources in risk and financial crime, updating a range of systems and continuing to review our policies and processes. Expenses will continue to be high in this area, but we are now over 90% complete on the planned increase in resources. Ensuring we supported customers throughout COVID, we increased expenses 137 million as we added resources to our customer assist teams brought some critical functions back online and invested more in work from home and safety measures. We know our cost base must reduce to reflect the revenue environment and our simplified operating structure. This work is at an early stage and I'll talk more about our three-year plan at the half-year. A driver of expenses has been increased investment. This chart shows how we have prioritised this year. With our risk and compliance shortcomings, This area has absorbed all the investment increases. Given the high cost of not getting things right, we are not compromising on the necessary investment. Some of the major investments in this bucket include our risk systems along with enhancements in the prevention of financial crime. We've also completed the installation of a new complaints management system that is driving change in how we monitor, manage and resolve complaints and better identify the source of issues. In the growth bucket, we've continued to invest in some of our key platforms, including a customer service hub, Panorama, and in extending the reach of the new payments platform, each of these providing customer benefits. Other includes spend on cybersecurity and system upgrades. The rise in amortisation of $105 million reflects the full period impact of key systems coming online, including a customer service hub and the NPP. This chart clearly shows where the provisioning action has been through the year with all the change in our collectively assessed provision bucket. On the far left, new IAPs were lower than the last half with just one larger exposure emerging. Right backs and recoveries fell slightly while write-offs direct were flat. While we continue to build collective provisions and having booked a large increase in the first half, there was less need to top up. Let's look at the provisioning in a little bit more detail. We've spoken a lot about how our provisioning has been determined and we've used the same structure this half. In aggregate, we topped up provisions by over $2.2 billion through the year with just over 80% in the first half. That increase lifted our total ECL provisions to $6.2 billion, more than 50% higher than a year earlier. On a coverage basis, total provisions to credit risk-weighted assets was at 171 basis points. The largest contributor to the provision in the half was the impact of stress on our portfolio up $439 million. You can see that in both the mortgage delinquencies and the downgrades across the business and institutional portfolio, including high-risk sectors of commercial property and accommodation. Economic impacts were a small positive, reflecting the improved economic outlook. We've made no changes to the weights of economic scenarios. Overlays were largely unchanged, up just $15 million. we have seen business overlays either utilised or reduced as we completed our reviews, offset by further top-ups for customers on deferral packages. As Peter mentioned, there are a few moving parts impacting our CET1 ratio. As you can see on the left, the earnings in the half added 37 basis points, capital deductions were 11 basis points and risk-weighted assets added one basis point. Capital deductions mostly reflected deferred tax assets related to higher provisions, economic hedges recognised in net profit, partially offset by a lower deduction for intangible assets. Credit risk weighted assets this half reflected the book shrinking and model changes, as well as market and exchange rate volatility. This was partially offset by credit deterioration. On the right, we've again provided our credit risk weighted asset sensitivity. The base case for FY21 is 64 basis points and 36 basis points for FY22. So far, we have seen 16 basis points come through. This reflects downgrades not being as widespread at this point in the cycle as we had originally modelled. In retail credit, we've seen the quality of the non-defaulted book improve and this has largely offset the rise in defaults. It's important to note that loans in deferral don't contribute to credit risk-weighted assets under the current APRA concessional treatment. Looking ahead, it is fair to say that fiscal and monetary policy support has been good for the economy. This has meant our corporate customers have improved cash flow and more consumers are exiting deferral packages. But there is still a deal of uncertainty. Low rates are a particular challenge for banks. While excess liquidity in the system has ensured that the market is well supplied with funds, this invariably heightens competition particularly when demand is weak. We will continue to prioritise support for customers and while the lower deferrals are pleasing, many customers are still doing it tough. These will continue to be headwinds in the year ahead. Turning to the components of earnings. On the outlook for lending, economic forecasts point to system business lending being down 3.5% and mortgage growth at 3.2% over FY21. We are seeking to get back to growth in the second half. Low interest rates will continue to impact margins, while competition will drive retention pricing and elevated refinancing in mortgages. On cost, the decision to support customers through COVID in enhanced as will the amortisation impact of higher investment spend in FY20. The cost reset program that I am taking personal leadership of will address our longer-term sustainable cost base, and I'll have more to say about that after half a year. Quality have been more positive, there is still uncertainty, and we will look to retain our... I'll now hand back to Andrew for Q&A.