In a watershed year, we have made significant changes to the way we serve customers, our business structure and in the technology we use to ...
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LETTER
16 CEO SHAREHOLDER LETTER BRIAN HARTZER WESTPAC GROUP
CEO Shareholder
Letter
In a watershed year, we have made significant
changes to the way we serve customers,
our business structure and in the technology
we use to support our people and customers.
Dear Shareholder, of a major new technology system – the
Customer Service Hub – that provides
The 2019 financial year was a watershed the foundation for improving both service
year for the banking industry, and for quality and cost over the next several years.
Westpac. In response to the issues
highlighted by the Royal Commission1 We also booked significant provisions
and our Culture, Governance, and for customer remediation payments and
Accountability (CGA) self-assessment2, costs associated with our former financial
various regulatory actions across the planning network and various other
industry, and a rapidly evolving competitive operational issues we identified as part of
environment, we have made significant our ‘get it right, put it right’ initiative.
changes to the way we serve customers, Externally, we confronted the impact of
to our business structure, and in the significantly lower interest rates and a
technology we use to support our people substantial fall in demand for lending. This
and our customers. coincided with increased competition from
These changes include the implementation both traditional and new competitors,
of the new Banking Code of Practice; new many of whom are being enabled by
policies and approaches for supporting advances in digital and mobile technology.
vulnerable customers; the decision to Due to these and other factors, our
exit our financial planning business; the financial performance for the year was
implementation of a number of new disappointing. I am acutely aware of the
controls and compliance processes, faith you place in us to look after your
particularly in lending; and the roll-out investment and deliver acceptable returns
– including dividends. And I would like
1. Officially, “The Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry”.
2. Westpac’s Culture, Governance and Accountability self-assessment (CGA) was produced for the Westpac Board and
APRA. A copy is available on our website.
LETTER
2019 ANNUAL REVIEW & SUSTAINABILITY REPORT 17
to assure you that, despite the unusually 3. How are we progressing on our key takes for people to clear their loans when
large number of challenges we faced this priorities? they need to sell. Our institutional bank
year, your management team is committed 4. How are we improving non-financial risks, impaired assets to total exposure remain
to investing in the changes needed to culture, and governance? very low at just 0.08%, while in business
build a more sustainable business and lending, impaired assets to total exposure
5. How is the market evolving, and what are
deliver superior returns over time. were up just 3 basis points to 0.62%, over
our priorities to respond?
As part of this commitment, we made the last 6 months. In New Zealand, the
6. What is the outlook for 2020? picture is similar with impaired assets to
further progress on our aspiration to be
one of the world’s great service companies. total exposure just 0.08%, with the ratio
1. W
hat drove financial performance almost halving over the year. The quality
This included improvements in service
this year? of our credit book meant that impairment
quality, digital transformation, productivity,
and service culture. While much work We consider financial performance charges declined 2% to $794 million,
remains, we finish this year stronger than across four dimensions: strength, return, representing 11 basis points of gross loans.
we started, with a clear plan and a high productivity, and growth. To be sustainable, We finished the year with a strong funding
quality, motivated workforce who are banks must strike the right balance across and liquidity position, which provides
committed to improving execution and all these dimensions – and we have had resilience in the event of market disruption.
getting things done. reasonable success on each. We fully funded new lending with customer
As in previous years, my goal with this Balance sheet strength will always be our deposits, and our Net Stable Funding ratio
letter is to explain what happened this number one priority. The lessons of the (which measures the proportion of our
year, what we have achieved, and where 1991 recession (the importance of strong funding that comes from ‘sticky’ deposits
we have fallen short. I also want to address credit risk disciplines) and the 2008 Global and other long-term funding sources) was
the changing strategic environment that Financial Crisis (the importance of strong 112% – well above the 100% regulatory
we face and how we are adapting so funding, liquidity, and capital) are alive minimum. At the end of September, we
we emerge from this period as the best and well. held $144 billion in cash and other liquid
positioned bank to deliver sustainable Credit quality remained sound over the assets, representing 127% of our short-term
returns into the future. year, although as expected we did see a liabilities (the Liquidity Coverage Ratio).
I’ve organised this letter to respond to moderate deterioration in delinquencies on Our Common equity tier 1 capital ratio
the following questions: housing loans, with 0.88% of loan balances finished the year at 10.7%, and above
more than 90 days past due. This mostly APRA’s ‘unquestionably strong’ benchmark.
1. What drove financial performance reflects some increase in stress and a (I will discuss our capital position in more
this year? slowdown in housing turnover in certain detail later in this letter.)
2. Why are we raising capital? parts of the country, increasing the time it
Funding and Liquidity
$525bn $718bn
CUSTOMER TOTAL GROSS
DEPOSITS LOANS1
– TERM DEPOSITS
– SAVINGS $449bn
AUSTRALIAN
HOME LOANS
$249bn $839bn
FUNDING
$152bn
AUSTRALIAN
BUSINESS LOANS
WHOLESALE FUNDING
– SHORT TERM $21bn
– LONG TERM AUSTRALIAN
– SECURITISATION PERSONAL LOANS
$78bn2 • Overall funding mix was relatively
$65bn NEW ZEALAND
LOANS
stable over the year.
• Customer deposits fully funded
SHAREHOLDER’S $17bn lending in FY19 with the customer
OTHER OVERSEAS
EQUITY LOANS deposits to net loans ratio rising
to 73.4% (up from 73.0% in 2018).
1. Total Gross Loans excludes provisions of $3bn.
2. $AUD.
LETTER
18 CEO SHAREHOLDER LETTER BRIAN HARTZER WESTPAC GROUP
We achieved our productivity
goal of delivering $405m
in savings.
Turning to returns, our overall financial the economy, our risk appetite, and
Performance Metrics result for FY19 was disappointing. the decision to prioritise margin. In
Cash earnings basis Reported profit was down 16% to housing, we also implemented a number
$6,784 million and cash earnings were of changes to our loan assessment
$6,849 million in FY19, down 15% or approach, and unfortunately, did so in
RETURNS $1,216 million. a way that made the application process
CASH RETURN ON EQUITY (%)
Performance was significantly impacted harder than it needed to be. Given
2019 10.8
by notable items of $1,130 million (after industry competition, some customers
tax) in FY19 – $849 million higher than and brokers diverted their business
2018 13.0
the previous year and accounting for elsewhere – and our lending slowed.
2017 13.8
most of the decline in cash earnings. In response, we’re working hard to
2016 14.0 These notable items largely reflect simplify our processes, with a number
provisions we’ve set aside for customer of improvements already rolled out.
2015 15.8
0 4 8 12 16
remediation and costs associated with As a result, we expect home lending
exiting our financial planning business. to contract early in the year but to be
Excluding notable items, cash earnings growing in line with the system by the
MARGINS were $367 million lower – down 4% end of the 2020 financial year.
NET INTEREST MARGIN (%)1
compared to FY18. This decline was Small business growth has also been
2019 2.12 mostly due to a 7 basis-point decline affected by more onerous lending
in margins to 2.16% as a consequence requirements, given the links between
2018 2.22
of a lower Treasury contribution and an many small business customers’ personal
2017 2.19 extremely competitive environment. and business finances. Credit demand
Earnings were also impacted by lower was also weaker among larger customers
2016 2.13
revenue in wealth management, and – including corporates – but this was
2015 2.08 insurance. In wealth, revenue was more a function of weaker business
0.00 0.46 0.92 1.38 1.84 2.30 down following the exit of our financial sentiment and a softer economic outlook.
planning business, the removal of The reduction in cash earnings, and an
grandfathered commissions, the increase in the strength of our capital
EFFICIENCY
EXPENSE TO INCOME RATIO (%) migration of MySuper accounts and the base, meant that the return on equity
decision to reprice platform margins declined to 10.75% – down over 2
2019 48.6 – each of which hurts revenue in the percentage points over the year. Given
2018 43.8 short term but supports customers the importance of capital as a driver
and helps us build a more sustainable of return on equity, it is important to
2017 42.2 business. The lower Insurance income understand why we are raising capital
2016 42.1 was primarily due to higher claims, at this point.
particularly from the severe weather
2015 42.1
events (Qld storms and NSW hailstorms) 2. Why are we raising capital?
0 10 20 30 40 50
experienced early in 2019. Our common equity tier 1 (CET1) capital
Given the challenging environment, ratio of 10.7% remains well above the 8%
productivity was a major focus this year. minimum regulatory requirement and is
LIQUIDITY COVERAGE RATIO
(%) We achieved our productivity goal by ahead of APRA’s unquestionably strong
delivering $405 million in savings. This benchmark. We hold around $46 billion
2019 127 in common equity, up $7 billion over the
reflected the continued progress on our
2018 133 digital agenda – as customers shift to last three years. That capital provides the
self-service and we automate manual backing to absorb losses in the event of a
2017 124
processes – as well as better supplier downturn and forms part of the funding
2016 134 management and the implementation pool for our lending. In addition, banks
of a simpler management structure with high capital backing are generally
2015 121
across the Group. rewarded with higher credit ratings,
0 28 56 84 112 140
which make it cheaper to borrow in
Growth this year – particularly balance
capital markets, particularly offshore.
1. 2015 and 2016 numbers have not been restated
sheet growth – was relatively slow,
in line with current accounting standards. reflecting lower credit demand in
LETTER
2019 ANNUAL REVIEW & SUSTAINABILITY REPORT 19
CASE STUDY
Helping when it matters
Helping customers
through a one-in-five-
hundred year flood.
The complexity comes in the way
regulators assess our capital position
– usually through the ratio of capital to
risk-weighted assets (the CET1 capital
ratio). From time-to-time regulators
recalibrate how they measure risk-
weighted assets, and what should be
included, or excluded, from the capital
base. This in turn can reduce the reported
capital ratio, despite the actual dollar
amount of capital going up. In addition,
earlier in the year APRA applied a $500
million capital overlay to Westpac (and
other Major banks) until such time as we
complete the actions from our CGA self-
assessment. This overlay translated into a
further reduction in our CET1 capital ratio
of 16 basis points.
At the end of September, our CET1
capital ratio would have been around
Alan Francis, Senior Insurance Claims Consultant
75 basis points higher had it not been on the ground after the Townsville flood.
for such developments. Looking ahead,
we face continued uncertainty around
APRA’s capital requirements, the Westpac’s coordinated approach and personal necessities for the
potential for further regulatory actions across banking and insurance customer and her children while the
and costs, and the earnings headwinds helped customers affected by the family home was assessed and repaired.
of low interest rates and higher recent Townsville flood get back “It was a massive relief for the customer
compliance costs. Furthermore, the on their feet. at an incredibly stressful time.”
Reserve Bank of New Zealand is currently
proposing to significantly increase the When a one-in-five-hundred year flood Flood relief
capital requirements for New Zealand struck Townsville in February 2019, Westpac provided over 435
Banks (although the amount of the Westpac trucked in its portable branch disaster relief packages to flood-
increase is yet to be finalised). – known as our ‘bank in a box’ – to affected customers to help make
Given our priority for balance sheet help customers manage their banking, it easier for them to manage their
strength, we concluded that the prudent process their insurance claims, and get finances, including providing
course of action was to seek to raise them back on their feet. alternative arrangements such as
$2.5 billion in capital, which increases The 40ft shipping container was repayment holidays.
our CET1 capital ratio by around 58 equipped with smart ATMs, an electronic Over 1,751 General Insurance claims
basis points. This capital is expected night safe for small businesses to make were received, totalling $74 million.
to increase our buffer above APRA’s deposits, meeting rooms and video 1,394 claims have been finalised and
unquestionably strong benchmark of conferencing facilities; and was staffed $55 million paid to customers.
10.5% and position us to respond to with employees ready to help.
potential future impacts on capital Westpac committed $50 million to a
Alan Francis, a Senior Insurance Claims flood relief fund dedicated to helping
(indicated above) and continue to lend Consultant was part of the team on
and support the economy in the event farmers rebuild their businesses. Loans
the ground and helped customers of up to $2 million were also made
of a downturn. make insurance claims, including a available to eligible customers on an
Our decision to reduce the dividend to mother of two small children having interest-only basis for up to three years
80 cents per share was not easy, as we to urgently evacuate her home due to and at a reduced interest rate.
know that many shareholders rely on rising flood waters.
our dividends for income. In addition, Westpac also donated $250,000 to
“She was of course very distressed,” flood-affected communities: $150,000
we carry a substantial balance of franking said Alan.
credits that we would like to distribute to the Salvation Army and $100,000
to our shareholders. However, with “Ensuring the personal safety of to the Foundation for Rural &
increased shares on issue and downward customers is our first priority. We Regional Renewal to support disaster
pressure on returns, we felt it was immediately organised a $5,000 recovery and programs to build local
prudent to bring our payout to a range emergency payment to help pay for community resilience.
that allows us to retain sufficient capital emergency accommodation, clothing
to support future growth.LETTER
20 CEO SHAREHOLDER LETTER BRIAN HARTZER WESTPAC GROUP
The faster we resolve these
issues, the sooner we can
refocus investment and
management attention on
delivering more for customers.
3. H
ow are we progressing on our planning business had been loss-making
Performance Metrics strategic priorities? for some time and so this change is
Cash earnings basis In my letter last year, I identified three expected to be EPS positive in 2020.
priorities for the year ahead: Exiting the business came with an
immediate shut-down cost, but this will
EARNINGS • Deal with outstanding issues;
CASH EARNINGS PER ORDINARY SHARE (CENTS)
be quickly offset by cost savings and
• Maintain momentum in our customer reduced risk. Our remaining Insurance,
2019 198.2 franchise; and Superannuation, Investments, Platforms
• Structural cost reduction. and Private Wealth businesses have
2018 236.2
been integrated into our Consumer and
2017 239.7 Deal with outstanding issues Business divisions.
In recent years a number of issues Customer remediation was another area
2016 235.5
have emerged relating to past business of focus. Over the course of the year we
2015 248.2 practices, operational errors, gaps in continued to work through a backlog of
compliance, or changes in regulation. historical issues in our financial planning
These were identified through the Royal and banking businesses and we continue
Commission, our CGA self-assessment, to work with regulators to agree on a fair
ASSET QUALITY STRESSED
ASSETS TO TOTAL COMMITTED EXPOSURES (%) ongoing product reviews, and various and reasonable approach to remediation.
regulatory actions. The faster we resolve
2019 1.20 these issues, the sooner we can refocus The most significant of these issues is
investment and management attention the so-called “fee for no service” issue in
2018 1.08
on delivering more for customers, thereby financial planning.
2017 1.05 increasing the value of our franchise. Under the “Future of Financial Advice”
2016 1.20 The most significant change over the (FOFA) legislation introduced in
year was the exit of our financial planning 2012, financial planning businesses
2015 0.99 were required to eliminate ‘conflicted
0.0 0.2 0.4 0.6 0.8 1.0 1.2 business and reducing our operating
divisions from five to four. The financial remuneration’ (commission) payments
CAPITAL
COMMON EQUITY TIER 1 CAPITAL RATIO (%)
Financial performance1
2019 10.7
Movement in cash earnings ($million)
2018 10.6
281 8,346 5
2017 10.6 8,065 213 7,979
2016 9.5
8000 (619)
16 18
6,849
2015 9.5 (1,130)
0.0000001.8333333.6666675.5000007.3333339.16666711.000000 6000
DIVIDENDS
(CENTS PER SHARE)
4000
2019 174
2018 188
2000 Down 4% ex-notable items
2017 188 Down 15%
2016 188
0 FY18 FY19
FY18
notable
items
FY18
ex-notable
items
Net interest
income
Non-interest
income
Expenses
Impairment
charges
Tax & NCI
FY19
ex-notable
items
FY19
notable
items
2015 187
0 50 100 150 200
1. In FY19 and FY18, the Group raised certain provisions known as ‘notable items’.
See our 2019 Investor Discussion Pack for further details.LETTER
2019 ANNUAL REVIEW & SUSTAINABILITY REPORT 21
CASE STUDY
Better supporting customers
Presto,
Lune Croissanterie.
to planners and move to a fee-for-service
model. As part of this, BT implemented
systems (including new contracts, new
technology, and an annual fee disclosure
statement) seeking to ensure customers
received the advice services they were
paying for. However, as with other financial
planning businesses, we identified some
incidences of advice not being provided
and cases where insufficient records were
retained to meet regulator expectations.
We have therefore been working through
a process to review our customer files
and repay customers where appropriate.
This issue is more complex in the case
of aligned dealer group planners, who
operated separately, but under our licence.
This was a standard industry practice,
where companies like BT provided
licensing and back-office services to
planning groups. In these cases, we face
significant logistical challenges in obtaining
and checking all the historical files of those
non-Westpac advisers, particularly if they
have left the industry.
Other remediation matters include
instances where we didn’t meet
certain reporting standards, or made
administrative or operational errors in
certain products. We have established a Presto is helping businesses like “We’re passionate about our pastries
dedicated remediation hub to streamline Melbourne’s Lune Croissanterie and are determined that the whole
the process of refunding customers. provide a better experience experience for customers is fantastic
Currently there are around 750 staff to customers. – from the moment they step into our
dedicated to remediation activities, and store, to the last bite,” says Cameron.
since 2017 we have paid out $350m in Croissants from Lune Croissanterie Lune serves over 2,500 croissants
compensation to customers. have been hailed as one of the a day which translates into a similar
world’s finest by a New York Times number of transactions.
Beyond remediation, our response to
food critic. The customer following
the findings of the Royal Commission “Most of our customers pay by card,
amassed over the last seven years
and our CGA self-assessment are well is testament to this claim. so having a reliable merchant terminal
underway. We have implemented 11 integrated with our systems is
recommendations as part of our Royal Kate Reid, a former aerospace important to us,” says Cameron.
Commission program with a further engineer, founded Lune in 2012.
She channelled her precision and Presto integrates the merchant
11 currently being implemented. We
technical skills into making the terminal with Lune’s point-of-sale
have commenced work on most of the
perfect croissant and started selling system, eliminating the need to
remaining 27 recommendations that manually key in sale amounts and
them from a hole-in-the-wall shop in
presently apply to us, but we will need complete end-of-day reconciliations.
the bay-side suburb of Elwood.
to wait until the government passes the This improves productivity, reduces
required legislation before we can fully After joining forces with her brother, risk of error and streamlines
progress the bulk of these. With our CGA Cameron, in 2015 the siblings reconciliations.
action plan, we have implemented 40% of expanded the baking business and
the recommendations and we expect to today have two stores – one in “By making the transaction process
Melbourne’s CBD, the other in Fitzroy faster and easier for our staff and
implement the remainder by March 2021.
– and employ 65 staff. seamless for customers, Presto is a
Changes we have made so far include
welcomed addition to our business.”
centralising our complaints management,
enhancing consequence management and
remuneration governance, and introducing
new board and committee processes.LETTER
22 CEO SHAREHOLDER LETTER BRIAN HARTZER WESTPAC GROUP
The long-term success of
our business depends on the
strength and depth of our
customer relationships.
Maintaining momentum in our of the real time New Payments Platform Increasing structural productivity
customer franchise which has seen us process around 40% of Using technology to drive down costs is
The long-term success of our business the flows on this platform. Around 40% of an important part of our strategy to remain
depends on the strength and depth of our digital sales are now completed online competitive and deliver good returns
our customer relationships. In 2019 we – a material uplift from just a few years ago. over time. This is increasingly important
continued to improve our service offering We have also completed major upgrades in a low-rate, slow-growth environment
and the technology needed to deliver to our technology infrastructure that where margins are under pressure and
better service in the future. have improved reliability and will regulatory and compliance costs are rising.
In recent years we have built a strong ultimately enable us to deliver even At the same time, emerging competitors
service ethos throughout the company. more for customers. have no physical networks to support
Employees participate at least weekly These include: and have a cost advantage in delivering
in service ‘huddles’, where we review some products.
• Launching our ‘Customer Service Hub’,
our service standards, share stories a modern platform for originating and This year our $405 million in productivity
and examples of good service, and servicing mortgages and other consumer savings through a company-wide focus on
discuss where we can improve. This banking products; simplification, automation, and digitisation
reinforces our customer-first approach was up one-third on the productivity
• Rolling out a new data platform that
and is further supported by embedding savings delivered last year. Part of this
supports the Government’s ‘Open
customer satisfaction and related service reflects the benefits from prior investments
Banking’ regulations and will allow us to
metrics in individual scorecards and in digitisation and automation, while
better understand customer needs;
performance rewards. a continued shift of customers from
• Completing the rollout of Panorama, our physical to digital channels allowed us to
A focus this year was on improving our
market-leading investment platform for rationalise 61 branches and reduce ATM
ability to identify and support vulnerable
independent financial advisors and their numbers by 375.
customers. This included setting up a new
clients; and
Customer Vulnerability Council, making Physical presence continues to be
changes to various complaints policies, • Renewing much of our underlying important for many customers and we
and rolling out training to our people on network and data centre infrastructure. are investing to upgrade our branch
how to identify customers experiencing This included moving over 600 network in high-volume locations. However,
vulnerability. We promoted this through applications to the new environment and changing customer traffic patterns into
our Westpac “Help when it matters” upgrading over 300 applications hosted regional centres and the increasing use of
advertising, with campaigns around on legacy infrastructure. contactless cards and mobile payments
relationship breakdown, loss of a loved one, mean that we need fewer, well located
These and other changes have materially
and the impact of natural disasters. branches to meet demand. To further
improved system stability with no major
Our continued focus on service has led improve efficiency, we have entered into an
system outages in FY19 – a big step up
to a 2% rise in customers to 11.2 million agreement to sell most of our ‘off-site’ ATM
when you consider just a few years ago
in Australia. In business, we held our #1 network to a third-party. This agreement
we experienced one or two major issues
NPS3 ranking in each of our key segments materially retains the level of service
a month. Further changes and upgrades
and increased our lead on #2, while in Westpac customers currently receive
are planned that will further improve the
consumer, we rank #3 on NPS and closed from our ATM network but will allow us
experience for customers and enable more
the gap to #1. to benefit from scale efficiencies that this
efficient processes for our bankers.
third party can achieve with their other
In technology, we delivered several new At the same time, competition has cash processing.
digital innovations to make things better intensified, especially in the mortgage
for customers. These included our AI Other cost initiatives during the
business. As I indicated earlier, stepping
chat-bot ‘Red’, which can respond in year included renegotiating supplier
out of line with the market quickly impacts
real time to customer enquiries, a fully arrangements, further automating
market share. This happened to us in the
digital mortgage process for St.George back-office operations, and simplifying
latter part of the FY19, although we expect
customers, a new Digital Institutional Bank our organisational structure. In total, these
this to normalise through the year ahead.
platform, an online pricing platform for changes resulted in a net 5% reduction
term deposits, and an extensive rollout in full-time equivalent headcount across
the company, despite adding significant
extra resources to support the remediation
activities described above.
3. For details of the metric and metric provider, refer to Westpac Group 2019 Full Year Results Presentation and Investor Discussion Pack available at www.westpac.com.au.LETTER
2019 ANNUAL REVIEW & SUSTAINABILITY REPORT 23
CASE STUDY
Cyber security
Protecting
customers
from scams.
Increased compliance, regulatory, and 5. H
ow is the market evolving, and
remediation costs along with revenue what are our priorities to respond?
headwinds mean that productivity In 2015 we recognised that a once-in-
benefits are not yet visible in traditional a-generation change in banking was
measures of bank productivity, such underway, as a consequence of changing
as the cost-to-income ratio. However I customer behaviour, new technology, new
am confident that, as these programs competitors, and increased community
and the related costs roll off over the and regulatory expectations. Over the
next few years, the improved efficiency past year, these trends have accelerated.
and competitiveness of our underlying In particular, we see:
business will become apparent.
• An increasing shift to digital self-service
4. H
ow are we strengthening among customers;
non-financial risk, governance, • Increased competition, especially in
and accountability? Westpac’s Scams Assist team
mortgages, from foreign and regional
banks who rely on mortgage brokers is helping to protect customers
The findings of the Royal Commission
and our CGA self-assessment highlighted for their sales; against scams and in the process
a number of areas where we need to helped recover $26.3 million for
• The rise of digital-only competitors;
improve non-financial risk management, customers this year.
• The growth of fintech businesses offering
governance, and accountability. To address Keeping customer data and their
new, data-driven services;
these, several major programs of work accounts safe is a priority for
are under way, with specific actions being • Increased compliance costs and capital Westpac and we continue to invest
tracked and reported at both the Group requirements across traditional banking in strengthening our cyber security
Executive level and to the Board. businesses; and systems to deter attacks and help
Specific areas of focus include: • Continued reputational challenges for protect customers.
banks as a result of issues identified A recent case managed by Westpac
• Improving the identification, escalation,
through the Royal Commission. fraud officer, Cherish, brings to life the
and resolution of non-financial risk issues
across the Group, with a particular focus way we fend off scammers.
While these challenges are significant –
on financial crime-related issues; particularly in the short term – we believe A customer was on her landline phone
• Enhancing our end-to-end lending the longer-term outlook for a large bank speaking with someone pretending
processes; like Westpac remains positive given: to be from her telco provider. The
• The size and strength of our balance scammer had asked to download
• Providing more detailed reporting on software to ‘fix some issues’ he
operational and compliance incidents to sheet (especially our deposit base and
claimed were affecting her computer.
the Executive team and Board; diverse funding sources);
• The quality and scale of our customer Through our internal scams alert
• Improving the efficiency and
franchise, including our portfolio of system, I noticed unusual activity
effectiveness of committee meetings; on the customer’s online account.
brands and extensive data assets;
• Clarifying and strengthening resources The customer rarely used internet
under the ‘Three Lines of Defence’ • The financial resources and skills required banking and when she did, it was only
approach to risk management; to build the technical innovations and to check her accounts and never to
partnerships required in a digital world; make a payment.
• Clarifying individual accountability for
all managers, in line with the new BEAR4 • Our ability to meet ever-rising regulatory I immediately contacted the customer
regime; and expectations; and on her mobile phone, explaining that
• Improving awareness and protection for • Our ability to attract and retain top she was potentially the victim of a
whistle-blowers. quality talent in a small market, given our remote access scam. Confused at
reputation as an employer of choice. first, she wasn’t sure who to believe,
In addition, we continue to enhance and but after I explained the situation
reinforce general risk awareness across she immediately shut her computer
the Group. down and hung up her landline. This
saved the customer $5,000 that the
scammer had attempted to transfer.
She was incredibly grateful.
4. BEAR: The Bank Executive Accountability Regime, administered by APRA.LETTER
24 CEO SHAREHOLDER LETTER BRIAN HARTZER WESTPAC GROUP
Westpac’s future is very bright
and 2019 will prove to be a
watershed for us.
We recognise that we are a service • Digital transformation: Using technology 6. What is the outlook for 2020?
business: We’ve set the goal for Westpac to materially improve efficiency and The economic outlook for Australia remains
to be “one of the world’s great service reduce the Group’s cost-to-income ratio challenging, in part reflecting a softer
companies, helping our customers, below 40% in the medium-term. This will global environment. Annualised growth
communities and our people to prosper include migrating more sales and service in the June quarter of 2019 was only 1.4%,
and grow.” activity to digital, reshaping the Group’s which is lower than population growth
To grow the long-term value of the distribution network, modernising of 1.6%. The dynamics of global trade,
company, our strategy is to build scale underlying technology platforms, and weak real wages growth, a softer housing
in customer relationships through the building an extensive network of digital market, low interest rates and subdued
provision of world-class service; supported partnerships and data assets. economic activity have all dampened
by a strong balance sheet, great people, While we will continue to deliver this consumer confidence.
and a modern, highly efficient technology program of work over several years, we That said, overall GDP growth remains
platform, as well as a network of have set a number of specific priorities positive and the economy continues to
partnerships among new, digitally-savvy over the next couple of years. These are: benefit from a strong resources sector, a
competitors and suppliers. lower Australian dollar, large infrastructure
1. Service leadership:
To bring this strategy to life, we are investments, and targeted income tax cuts.
• Extend our #1 in NPS for business A slowdown in residential construction over
continuing to deliver on a multi-year
investment program we call the “Service • Close the gap to the #1 major bank the last year, combined with lower interest
Revolution”, designed to strengthen in consumer rates, should see a continued recovery in
our competitive offers and reshape the house prices building on the momentum
2. Digital transformation:
capabilities and cost structure of the we have seen in the September quarter,
company. This program is organised • Complete roll-out of the Customer particularly in Sydney and Melbourne.
around three themes: Service Hub to all our mortgage However GDP growth is likely to remain
bankers and to external brokers below longer-term averages (which is
• Performance disciplines: Prudently
managing our capital, funding, and • Launch a new mobile banking app with 2.75%) at 2.3% for calendar 2019 and 2.4%
liquidity; seeking to maintain a superior improved usability and functionality for calendar 2020.
ROE to the peer average while remaining • Launch Open Banking data capabilities With consumer and business confidence
targeted and disciplined on asset growth • Drive digital sales to 45% across relatively weak, credit growth has been
and credit quality; the Group slow. Overall credit growth for the
• Service leadership: Continuing to Australian financial system slowed to 2.7%
3. Performance discipline: in the year to September 2019, down from
grow the Group’s customer base while
increasing the quality and depth of those • Deliver $500 million in annual 4.5% a year ago. That included a decline in
relationships, as measured through the productivity savings in FY20 housing credit growth from 5.4% to 3.1%;
number of customers who view us as (23% above FY19) business from 3.8% to 3.3% and personal
their main financial institution. We look credit contracting by 4.4% after declining
• Further reshape the network
to achieve this by delivering world-class by 1% a year earlier.
• Improve controls and risk management
service levels (both personal and digital), We expect credit growth to lift slightly in
capabilities to ensure Westpac is
as measured by NPS; recognising that 2020 to 3% overall, with housing credit
resilient for the future, including
a great service business requires a growth increasing to 3.5%. Business credit
further implementation of the Royal
high quality, well-trained, diverse, and growth is also expected to grow by around
Commission and CGA self-assessment
engaged workforce; and 3%, while other personal credit is expected
recommendations
to contract by around 2%.
We will report progress against each of Interest rates are expected to remain
these goals in our regular market updates. very low. The RBA reduced the cash rate
from 1.5% to 0.75% over the year, and weLETTER
2019 ANNUAL REVIEW & SUSTAINABILITY REPORT 25
expect a further rate cut to 0.5% in early Conclusion
2020. With rates at this level, there are I want to conclude by thanking
limited options for the RBA to cut further shareholders, on behalf of the management
if the economy turns down; however the team and all of our employees, for your
#1
Commonwealth Budget is set to return to continued support this year. We recognise
surplus in 2019/20 and the Commonwealth that reputational issues, regulatory and
government has the scope for additional legal issues, and financial performance
stimulus if required. challenges have made this a difficult year
Economic conditions in New Zealand have to be an investor in Westpac.
also softened, with sluggish consumer The year ahead will continue to be
spending and weak business confidence. challenging, from multiple perspectives
We expect a small improvement in 2020 – economic, competitive, legal,
supported by lower interest rates; some reputational, and regulatory. I hope that my
fiscal stimulus; and the competitive (lower) letter has provided some useful context as
New Zealand dollar.
For banks, the environment remains
to the nature of these challenges and the
clear-eyed way in which we are responding
Australia’s most
challenging. Interest rates at these low
levels put significant pressure on margins,
to this environment. We recognise where
we have fallen short, and are absolutely
sustainable bank.
as many deposits are essentially at a ‘floor’ committed to executing better and 2019 Dow Jones Sustainability
beyond which they can’t be repriced delivering on our strategy for the future. Indices Review.
down. In addition, earnings on invested Through everything that has happened this
capital and liquidity are progressively year, I remain very proud of this company, It is the 18th year in a row that Westpac has
lower as the portfolio rolls-over to much and its people. We are well positioned, been ranked amongst the global banking
lower interest rates. leadership group by the DJSI, this year at
with many talented, dedicated bankers
#9 globally.
Regulatory actions – flowing from the who come to work every day genuinely
Royal Commission and other industry seeking to deliver world-class service and
reviews and investigations – will continue innovation for customers.
to require significant investment and I believe Westpac’s future is very bright
management attention. Regulators have and 2019 will prove to be a watershed for
substantially stepped up their resources us in confronting the realities of a changed
and enforcement activity, leading to a banking environment and responding
dramatic increase in our own costs as we decisively in ways that set us up to
respond to the various enquiries, make outperform in the future.
improvements in our non-financial risk and
Once again, thank you for your continued
control environment, and deal with the
support and faith in the Westpac Group.
consequences – including fines and other
legal fees – related to any adverse findings.
In addition, regulators in Australia and
New Zealand have a number of reviews
underway, in many areas including home
loan pricing, remuneration, and capital/risk
weighted asset methodologies across the BRIAN HARTZER
sector. Further clarity on these reviews is Chief Executive Officer
expected in the year ahead. Westpac GroupYou can also read
