Group Chief Executive Officer (CEO), Brian Hartzer will be stepping down as CEO with current Chief Financial Officer (CFO), Peter King taking over as acting CEO, effective Monday 2 December.

Current Chief Operating Officer, Gary Thursby will act as CFO.

In addition to the executive changes, Mr Maxsted also announced that long-standing Director, Ewen Crouch has decided he will not seek re-election at the upcoming Westpac AGM. Mr Maxsted has also confirmed he will bring forward his retirement as Chairman to the first half of 2020.

This will enable an incoming Chairman and the Board to oversee the appointment of a permanent CEO.

“The Board accepts the gravity of the issues raised by AUSTRAC,” Mr Maxsted said.

“As was appropriate, we sought feedback from all our stakeholders including shareholders and having done so it became clear that Board and management changes were in the best interest of the Bank.

“Peter King has been appointed Acting CEO until a global search process for a new CEO is completed.

“Peter has had a long and distinguished career at Westpac and has been the CFO since 2014. He is the right choice to provide stability and direction to the Bank and its people.

“He is an executive of exceptional integrity who is deeply respected by the market and the entire Westpac team.

“The Board has asked Peter to focus on two immediate priorities: to implement the Westpac Response Plan and to continue to execute the Group’s broader strategy.

“We are determined to urgently fix these issues and lift our standards to ensure our anti-money laundering and other financial crime prevention processes are industry leading.

“We are currently working through our response to the Statement of Claim and will shortly commence the independent review. The Board will continue to provide updates on these issues.”

Mr Maxsted thanked Mr Hartzer for his service.

“Brian leaves the Bank with a strong balance sheet, with each of our businesses number one or two in their markets.”

Mr Hartzer said: “As CEO I accept that I am ultimately accountable for everything that happens at the Bank. And it is clear that we have fallen well short of what the community expects of us, and we expect of ourselves.”

Mr Maxsted said he would also like to acknowledge and thank Ewen for his integrity and substantial contribution during his six and half years as a Director of Westpac.

“Ewen’s extensive legal experience and commercial knowledge has been invaluable to the Board.”

Peter King said: “I am honoured to be appointed to this role. I understand the responsibility of this position and the importance of Westpac both as an institution and Australia’s oldest bank. I am committed to helping address the current issues and restore the reputation of the bank.” For further information: David Lording Andrew Bowden

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Brian Hartzer

Westpac Group acknowledges the civil proceedings commenced by AUSTRAC yesterday in relation to alleged contraventions of its obligations under the Anti-Money Laundering and Counter Terrorism Financing Act.

Westpac has previously publicly disclosed that it had self-reported to AUSTRAC a failure to report a large number of international funds transfer instructions (IFTIs) and that AUSTRAC was also investigating a number of other areas relating to Westpac’s processes, procedures and oversight.

The civil proceedings relate to these issues and allege failings in relation to correspondent banking, risk assessments, customer due diligence, transaction monitoring, record keeping and the passing on of certain data in funds transfer instructions.

Westpac Group’s Chief Executive Officer, Brian Hartzer said: “We recognise these are very serious and important issues. We are committed to assisting AUSTRAC and law enforcement agencies to stop financial crime.

“These issues should never have occurred and should have been identified and rectified sooner. It is disappointing that we have not met our own standards as well as regulatory expectations and requirements.

“Like many banks around the world, we have been heavily investing in a program of work to improve and bolster the management of financial crime risks including strengthening our policies, data feeding systems, processes and controls.

“We have implemented a range of additional steps in our processes including enhanced automatic detection systems and we continue to proactively engage with AUSTRAC to close any remaining gaps to meet their requirements as well as our own expectations. We are also an active member of the Fintel Alliance.

“As part of this we are also taking very seriously AUSTRAC’s concerns around appropriate customer due diligence on transactions to the Philippines and South East Asia, including reviewing relevant processes.

“In relation to IFTIs, we have closed the ACM product and reported all the relevant transactions to AUSTRAC. The majority of the payments for which the reports were not generated were recurring, low value payments made by foreign government pension funds to people living in Australia.

“We will shortly be reporting a small number of remaining IFTIs related to our LitePay product.”

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Brian Hartzer

Financial highlights Full Year 2019 compared to Full Year 2018¹

• Statutory net profit $6,784 million, down 16%
• Cash earnings $6,849 million, down 15%
• Cash earnings per share 198.2 cents, down 16%
• Net interest margin 2.12%, down 10 bps
• Return on equity (ROE) 10.75%, down 225 bps
• Common equity Tier 1 (CET1) capital ratio of 10.7%, above APRA’s unquestionably strong benchmark
• Excluding notable items2, cash earnings $7,979 million, down 4%
• Excluding notable items2, ROE 12.52%, down 94 bps
• Final fully franked dividend 80 cents per share, down 15% from 94 cents per share

Re-setting for new environment

• Seeking to raise approximately $2.5 billion in capital which on a pro-forma basis is expected to increase our 30 September 2019 CET1 capital ratio by ~58 bps
• 2H19 dividend reduced to bring payout ratio to a more sustainable range
• Preparing for our digital future by investing in a new digital-only banking platform
• Group-wide goal to have the highest major bank Net Promoter Score across each division

Westpac Group CEO, Mr Brian Hartzer, said: “2019 has been a disappointing year. Financial results are down significantly in a challenging, low-growth, low interest rate environment.

“Our result was impacted by customer remediation costs and the reset of our Wealth business. Excluding these notable items², cash earnings were down 4% on FY18, which was mainly due to a reduction in wealth and insurance income from the exit of our financial planning business, higher insurance claims, and the impact of regulatory changes on revenue.

“Importantly, 2019 has also been a watershed year where we’ve acted decisively to respond to the challenging conditions. We’ve progressed the implementation of a number of recommendations from the Royal Commission and our Culture, Governance and Accountability (CGA) self-assessment, and continued our focus on putting things right for customers.

“This year our productivity savings increased 33% to $405 million, and we reduced our FTE by 5%, or approximately 1,700 people.

“We established a remediation hub to speed up the process of refunding customers, and since 2017 have paid out around $350 million in refunds to more than 500,000 customers as part of our get it right, put it right initiative.

“Credit quality remains sound and impairment charges remain low at 11 basis points of loans. Nevertheless, we have seen a small rise in 90 day mortgage delinquencies over the year, in part due to low wage growth and slowing economic activity. 70% of our Australian home loan customers are ahead on their repayments including offset accounts.

“We have delivered innovations to make it easier for customers to do their banking, including our virtual assistant chatbot ‘Red’, which has had almost 1 million interactions with customers and resolved more than 70% of queries without escalation to a banker.

“We have also invested in a range of fintech partnerships that open up opportunities in an increasingly digitised world.

“With our mix of businesses that are number one or two in market share across all our major segments, we have a franchise that is in good shape.”

Mr Hartzer said re-setting the company for the future was a priority, in particular further strengthening Westpac’s balance sheet in a low interest rate environment and dealing with potential uncertainties.

“We expect $500 million of productivity savings in FY20 as well as another $200 million from the Wealth reset, including the exit of our financial planning business. This will be partly offset by incremental spend on improving risk management over the next two years.”

Capital raising and dividend cut

“Given our priority for balance sheet strength and our goal to support customers’ growth, we are seeking to raise approximately $2.5 billion in capital to provide an increased buffer above APRA’s unquestionably strong benchmark. The raising also creates flexibility for changes in capital rules and for potential litigation or regulatory action.

“The decision to reduce our second half dividend to 80 cents per share was not easy, as we know many of our shareholders rely on our dividends for income. However, we felt it was necessary to bring the dividend payout ratio to a more sustainable medium-term range given the capital raising and lower return on equity.”

Positioning for a digital future

“We’re preparing for our digital future by investing in a new digital-only banking platform that will complement our existing banking businesses.

“This will initially operate a ‘bank-as-a-service’ model and we intend to bring new digital products and services to market through fintech and institutional partners. This will allow Westpac to reach a new group of customers as well as create value for our partners by enhancing the service offering to their own customers.

“As part of this initiative, Westpac expects to make a minority equity investment in UK-based cloud banking technology provider, 10x Future Technologies Holdings Limited.

“This initiative builds on the significant investment we have made – and will continue to make – in modernising our platforms, including the Customer Service Hub and Panorama. Together this will mean we have the right systems to meet changing customer needs now and in the future.”

Number one in customer service

“Westpac is committed to service leadership and has made significant progress in improving the service we provide customers.

We’re pleased to hold the #1 position in Net Promoter Score (NPS)³ for our Business division, including commercial, SME and micro business. For most of the year we were #2 for Consumer.

“We know we can do better in serving our customers and growing our business. That’s why we have set the goal of being number one on NPS across each of our divisions, and where we’re already number one, to extend our lead.

While it’s an ambitious goal, we think it’s achievable given the significant investment we have made in service and our track record over a long period of time,” Mr Hartzer said.

Dividends

The Board has determined a final, fully franked dividend of 80 cents per share to be paid on 20 December 2019. Total dividends for 2019 were 174 cents per share representing a payout ratio of 88.1% of cash earnings. The dividend reinvestment plan (DRP) will continue to operate and there will be no discount to the market price. Shares will be issued to satisfy the DRP.

Outlook

Mr Hartzer said that growth in the Australian economy will continue to be subdued with GDP growth to remain below trend at around 2.4% in 2020.

He said consumers remain cautious with flat wage growth constraining consumer spending. “

We expect the Australian economy will lift somewhat supported by lower interest rates, improved housing sentiment and targeted income tax cuts.

“We also expect the recent recovery in house prices, particularly in Sydney and Melbourne, to extend into 2020.

This will provide some boost to households which, nevertheless, are likely to remain cautious on further increasing debt levels. However, the contraction in the residential construction cycle will extend well into 2020. “We expect system credit growth in the year to September 2020 to lift from 2.7% this year to 3%. That will be largely driven by housing where we expect a lift from 3.1% to 3.5%, although business credit growth is expected to slow somewhat from 3.3% to 3%.

“Progress in dealing with trade disputes, particularly between the US and China, will be important for the outlook for the global economy and the flow on effect on business confidence and investment plans in Australia.”

Mr Hartzer said Westpac was dealing decisively with outstanding issues in a tough operating environment, including remediating customers as quickly as possible.

“At the same time we are keeping our balance sheet strong, digitising our business, modernising our platforms and becoming more efficient.

“Although 2020 will continue to be challenging, we believe our service led strategy, disciplined growth and solid portfolio of businesses will deliver for shareholders and customers,” he said

———-

[1] Reported on a cash earnings basis unless otherwise stated. For an explanation of cash earnings and reconciliation to reported results refer to Section 1.3.4 and Section 5, Note 8 of Westpac Group’s 2019 Full Year Financial Results Announcement.
[2] References to notable items in this release include provisions for estimated customer refunds, payments, associated costs and litigation ($958m after tax), and costs associated with the restructuring of the Wealth business ($172m after tax).
[3] Source: DBM Consultants Business Financial Services Monitor for Business results and Consumer Atlas for Consumer results, 6 months to August 2019, Westpac Group MFI customers. Commercial businesses with annual turnover $5m-$100m (excl. Agri); SME businesses with annual turnover $1m-$5m (excl. Agri) and Micro businesses with annual turnover under $1m (excl. Agri).

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Mr King has been the CFO since 2014 and prior to his current role was Deputy CFO.

Mr Hartzer said that Westpac had benefited from Peter’s deep financial services knowledge and understanding of all aspects of the business.

“Peter has played a critical role during a period of major change in Australian banking and as a result of his expertise and dedication, Westpac is a better and stronger bank,” Mr Hartzer said.

“During his time as CFO Peter has overseen a significant increase in the strength of our balance sheet, including the implementation of new capital, funding, and liquidity requirements. In addition, he has helped deliver a significant increase in investment to modernise and digitise our business, a reshaping of our business portfolio, and material improvements in productivity.

“Peter is known throughout Westpac for his integrity, his work ethic, and his ability to provide high quality counsel and guidance. His ability to meaningfully engage with people has earned him many friends and admirers across all levels of the bank.

“On behalf of all of us at Westpac, I would like to thank Peter for the significant contribution he has made to the Group and wish him every future success. On a personal note, I would also like to thank Peter for his leadership, support, and wise counsel as a member of my executive team,” he said.

Mr King said Westpac had provided him with enormous opportunities.

“I have had a varied and challenging career since joining the Group 25 years ago. Over that time, I have been involved in WIB and Treasury, Technology and Operations, Business and Consumer Banking and of course the Group Finance function,” Mr King said.

“Westpac has transformed itself through this period and is now a stronger, and more customer focused organisation. While we have more work to do, I believe Westpac is on the right track to not only continue to be financially successful but to be an organisation that customers want to bank with, and staff are proud to work for.”

Mr King has given 12 months’ notice and will continue in his role until a successor is appointed following an international search.

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Brian Hartzer

Westpac Group yesterday received APRA’s response to its Culture, Governance and Accountability (CGA) self-assessment process. In its response, APRA has decided to apply an additional $500 million to Westpac’s operational risk capital requirement.

This follows APRA concluding that Westpac was required to improve its management and oversight of non-financial risk. The additional capital requirement will remain in place until APRA is satisfied that Westpac has completed its action plan.

A summary of the CGA self-assessment’s findings was included in Westpac’s 2019 Interim Results Presentation and Investor Discussion Pack. The summary included key findings and outlined Westpac’s action plans across five areas: Board and executive governance, risk and compliance, customer, remuneration and accountability, and culture.

Westpac’s CGA self-assessment was undertaken by a joint team of Westpac employees and consultants from global management consulting firm, Oliver Wyman, and was submitted to APRA in November 2018. Westpac has today released a full copy of its CGA self-assessment on its website,

The $500m requirement, to be applied through an increase in risk weighted assets, will apply from 30 September 2019. This change is expected to reduce Westpac’s Level 2 common equity tier 1 (CET1) capital ratio by approximately 16 basis points. Westpac’s CET1 capital ratio at 31 March 2019 was 10.64%.

Westpac Group CEO Brian Hartzer, said: “The CGA self-assessment was a valuable exercise. We acknowledge the need to improve non-financial risk management and oversight and we are working to resolve the issues raised.

“Our Board and senior executives are committed to addressing the shortfalls identified in the report and will continue to provide regular updates on our progress.”

Westpac Group Chief Risk Officer, David Stephen, is leading a program of work, overseen by the Board, to implement the self-assessment’s recommendations. To date, around 20% of the recommendations have been implemented.

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