Westpac to raise $2.5b, profit slides 15pc

The move is designed to help Westpac avoid a second strike at its annual general meeting in December. All other group executives had their bonuses docked; the highest short-term award vested at 55 per cent of the maximum entitlement.

Westpac shares went into a trading halt at the open ahead of the capital raising announcement. The banks rivals all fell sharply at the open and at 10.30am ANZ was down 0.23 per cent, CBA was down 0.87 per cent and NAB was down 2.2 per cent ahead of its result on Thursday.

Citi analyst Brendan Sproules said the result was below slightly expectations and the capital raising was larger than anticipated.

“A slightly soft result,” Mr Sproules said in a flash note. “Westpac looks to have given itself a sizeable buffer to ‘Unquestionably Strong’ CET1 and has reset the dividend accordingly.”

Mr Hartzer said the $2.5 billion capital raising would provide the bank with a buffer over and above the prudential regulator's capital requirements which start on January 1. "The raising also creates flexibility for changes in capital rules and for potential litigation or regulatory action," the bank said.

As first reported by Street Talk, the bank will conduct its first capital raising since 2015 via an underwritten institutional placement of $2 billion and share purchase plan for retail shareholders of $500 million.

It will be used to shore up its common equity tier 1 (CET1) ratio ahead of the prudential regulator's unquestionably strong benchmark of 10.5 per cent by January 1, 2020.

Westpac cut its dividend for the first time since the global financial crisis in 2009.Analysts predicted the bank would need to cut the second half dividend from 94¢ in the previous half to 80¢, after keeping it steady at 94¢ for the previous eight halves. The reduction represents a 15 per cent fall in the second half dividend and 7.5 per cent for the full-year.

“This decision 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,” Mr Hartzer said.

Bell Potter analyst TS Lim said the dividend cut should be welcomed by the market. National Australia Bank reduced its first-half dividend in May, which followed ANZ rebasing its dividend in 2016.

"The results are pretty solid. Westpac is not relying on bad debt charges to boost the bottom line, and a capital raising and dividend cut is a cleaner outcome than underwriting the dividend reinvestment plan. They are re-basing themselves," Mr Lim said.

Westpac said it would invest in a new digital banking platform and expected to make a minority equity investment in 10x Future Technologies, a cloud banking platform founded by the ex-CEO of Barclays, Antony Jenkins.

The new digital strategy “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," Mr Hartzer said.

Westpac's net interest margin – a key measure of profitability which compares its cost of funds with the price it lends money to customers – fell 10 basis points over the year to 2.12 per cent from 2.22 per cent.

"Competition for loans and deposits and high liquidity also impacted margins," the bank said.

Return on equity also fell, down a whopping 225 basis points to 10.75 per cent. However excluding notableitems, ROE was down 94 basis points to 12.52 per cent. Last week, ANZ reported a fall in ROE to 10.9 per cent.

The consumer bank staged a recovery in the second half with earnings rising 5 per cent however earnings were 4 per cent lower year-on-year to $3.288 billion, as it fought against a decline in non-interest income and higher impairment charges.

The bank said changes to its mortgage decisioning process "made it harder to do business with us" contributing to a broad slowing of loan growth. Kinks in the system are not expected to be ironed out until the first half of 2020.

"We have implemented mortgage improvement processes in the last few weeks but it will take some time to improve new flows," outgoing chief financial officer Peter King said.

Bank CEO Brian Hartzer said the issues related to the introduction of new HEM data and a broker tool that he described as "clunky". The loss of momentum would ensure applications remained depressed for the immediate future, he said.

The business bank suffered the biggest hit with a 12 per cent fall in earnings to $2.431 billion sheeting the difference back to notableitems and higher regulatory costs. The business bank also suffered from a sharp fall in non-interest income which fell 11 per cent, due to provision and lower wealth income.

In the institutional bank, cash earnings were down 7 per cent over the year and 14 per cent in the second half, as impairments rose.

In terms of credit quality, Westpac said the mortgage book is fundamentally sound but the number of loans more than 90 days due were up 16 basis points over the year due to "the softening economic conditions and low wages growth."

Westpac said the number of properties in possession – homes it has repossessed after the owner defaulted in the loan – had risen to 558 from 396 at the same time last year.

“Properties in possession is up but it’s still a very very small number. It’s just under 600 on 1.2 million home loans," Mr Hartzer said.

Westpac had previously flagged an increase in customer compensation to $958 million for the year or a total of $1.9 billion since 2017. In an update of its remediation plans the bank said it had established a 'remediation hub' and had refunded 500,000 customers around $350 million to date.

The bank revealed it had closed 61 branches and removed or 'consolidated' 349 ATMs.

But operating expenses increased 3 per cent or $333 million but said this was mostly due to provisions and litigation costs. However, expenses would increase in 2020 "and remain high in 2021" due to more investment in risk and compliance.

“The cost to income ratio of 43.9 per cent is higher than we’d like but we are still targeting a cost to income ratio of below 40 per cent,” Mr Hartzer said.

"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," Mr Hartzer said.