Westpac’s shocker will test market’s faith

But this loan growth didn’t translate into earnings growth in Westpac’s retail bank, where competitive pressure on margins and extra costs required to keep the mortgage-processing machine on track saw earnings fall 6 per cent in the second half.

And yes, there’s a $3.5 billion share buyback that will be welcomed by shareholders after a difficult few years that has seen Westpac underperform its peers, due in no small part to its AUSTRAC and a series of operational issues.

Early stages of a restructuring

But even the buyback is actually a touch smaller than where most in the market expected it to be, although that is offset to some extent by a full-year dividend that beat consensus forecasts.

Overall, this is a picture of a bank in the very early stages of a restructuring that must simultaneously put right the problems of the past, stabilise current operations and find ways to expand in a financial services sector that is still being hit by waves of disruptive competition.

King says progress is being made, and he’s confident in the outlook for the bank. He is also sticking by his promise to slash expenses from $13.3 billion in the year to September to just $8 billion by the end of the 2024 financial year.

But the worse-than-expected fall in margins and the jump in expenses in the second half of 2021 will sorely test the market’s faith. The 6 per cent fall in Westpac shares on Monday morning took the stock to a six-month low and suggests the credibility of King’s turnaround has taken a hit.

The difficult balance of King’s three-pronged strategy – fix the problems of the past, simplify the bank by exiting unwanted businesses and finding pockets of growth – is neatly highlighted in what’s going on in the bank’s mortgage business.

Sharper pricing to win customers

Six months ago, as the housing market started to shake off the pandemic and started to accelerate, King struggled to process a barrage of mortgage applications and ceding market share. He has attacked the problem by investing in resources and digitising more of the mortgage process, and he’s now growing more or less in line with the broader market.

King has also had to provide sharper pricing to win customers; he quite reasonably argues that if he doesn’t hook mortgage customers now, Westpac can’t build the whole-of-life relationships that are the lifeblood of banking.

“We recognise that we have been ceding share and in fact in mortgages the book was contracting,” King says. “But over time we need to grow our customers, we need to grow our franchise.”

All of this means that led King to effectively prioritise growth over profits.

Speeding up its mortgage processing saw the investment of an extra $55 million in resources in the September half alone.

Of the 9 basis point fall in margins in the second half, Westpac says 6 basis points was related to competition and 3 basis points related to the higher proportion of fixed-rate mortgages it sold as the broader market…