Westpac 2019 Interim Financial Results Announcement
Incorporating the requirements of Appendix 4D
Westpac Banking Corporation ABN 33 007 457 141
2019
INTERIM
RESULTS
FOR THE SIX MONTHS ENDED
31 MARCH 2019
Results Announcement to the market
Westpac Group 2019 Interim Financial Results Announcement | iii
ASX Appendix 4D
Results for announcement to the market
1
Report for the half year ended 31 March 2019
2
Revenue from ordinary activities
3,4
($m)
down 10% to $9,979
Profit from ordinary activities after tax attributable to equity holders
4
($m)
down 24% to $3,173
Net profit for the period attributable to equity holders
4
($m)
down 24% to $3,173
Dividend Distributions (cents per ordinary share)
Amount
per security
Franked amount
per security
Interim Dividend 94 94
Record date for determining entitlements to the dividend
17 May 2019 (Sydney)
16 May 2019 (New York)
1
This document comprises the Westpac Group 2019 Interim Financial Results, including the 2019 Interim Financial Report contained in
Section 4 and is provided to the Australian Securities Exchange under Listing Rule 4.2A.
2
This report should be read in conjunction with the Westpac Group Annual Report 2018 and any public announcements made in the
period by the Westpac Group in accordance with the continuous disclosure requirements of the Corporations Act 2001 and ASX
Listing Rules.
3
Comprises reported interest income, interest expense and non-interest income.
4
All comparisons are with the reported results for the six months ended 31 March 2018.
Results Announcement to the market
ii | Westpac Group 2019 Interim Financial Results Announcement
Media
Release
6 May 2019
Westpac announces 2019 Half Year Result
• Statutory net profit $3,173 million, down 24%
• Cash earnings $3,296 million, down 22%
• Cash earnings per share, 96 cents, down 23%
• Return on equity (ROE) 10.4%, down 3.5 percentage points
• Interim fully franked dividend of 94 cents per share, unchanged
• Common equity Tier 1 capital ratio 10.64%, above APRA’s unquestionably strong benchmark
• Cash earnings, excluding major remediation and restructuring items
2
of $753 million (after tax), down 5%
• ROE, excluding major remediation and restructuring items
2
, 12.8%
Westpac Group CEO, Mr Brian Hartzer said: “This is a disappointing result reflecting weaker business conditions
and the bank dealing decisively with outstanding issues, including remediation and resetting our wealth strategy.
“The past six months has been a turning point for the bank. We are proactively addressing legacy issues while
improving our products and services to ensure they deliver the right customer outcomes. We’re exiting personal
financial advice to focus on the parts of our wealth business where we have a competitive advantage, and we are
delivering significant cost savings by simplifying our business.
“Despite the challenges of this transition period, we have managed our margins
3
well this half while we navigate a
very competitive, low-growth environment.”
Mr Hartzer said productivity remains a top priority, with around $146 million in cost savings delivered over the half.
With further cost initiatives underway, the bank is on track to deliver its target of $400 million in productivity
savings over the full year. We have reduced full time equivalent staff by 788 this half, and expenses excluding
major remediation and restructuring items
2
were down 3%.
“The result confirms the strength of our balance sheet. Our 10.64% common equity Tier 1 capital ratio remained
strong in a low growth environment, allowing us to absorb the significant impact of customer remediation
provisions and the costs of our wealth reset. Meanwhile, our liquidity and funding metrics are above regulatory
requirements.
“The credit quality of our loan book is sound, with the proportion of stressed exposures up one basis point on the
year. Impairments remain at cyclical lows and 69% of Australian mortgage customers are ahead on their
repayments
4
.”
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
and Section 5, Note 8 of Westpac Group’s 2019 Interim Financial Results Announcement.
2
References to major remediation and restructuring items in this release include provisions for estimated customer refunds, payments and associated
costs ($617 million after tax), and costs associated with the restructuring of the Wealth business ($136 million after tax).
3
Refers to net interest margins excluding Treasury & Markets.
4
Mortgages ahead on repayments exclude equity/line of credit products as there are no scheduled principal payments. Includes offset accounts.
Financial highlights First Half 2019 compared to First Half 2018
1
Results Announcement to the market
Westpac Group 2019 Interim Financial Results Announcement | iii
Mr Hartzer said restoring customer trust remained a priority for the Group.
“Despite our 202 year history, we know we still have to win back customers’ trust. We have improved complaints
handling, removed all teller incentives, and introduced new digital initiatives including a virtual chat assistant for
Westpac and digital mortgage applications for St.George, BankSA, and Bank of Melbourne.
“Our Customer Service Hub is now live and the first mortgages have been originated on the platform. This platform
will significantly improve the experience of getting a home loan, free up banker time, and help to reduce the costs
and time of loan origination.
“This half, we also reset our wealth strategy to ensure we can efficiently and sustainably serve our customers’
financial needs. By realigning BT’s wealth and insurance businesses into our Consumer and Business divisions
and introducing a new referral model for personal advice, we are building a stronger and more efficient bank. This
change supports our service strategy and our commitment to helping customers throughout their financial lives.
While we will incur some one-off costs this year, the changes are expected to be EPS accretive next financial year
through exiting a high cost, loss making financial advice business.
“Overall the clarity of our strategy, the size and strength of our growing customer franchise, the quality of our
people, and our strong balance sheet puts us in good stead to continue to navigate the challenges of this low
growth environment.”
Westpac has provisioned $1,445 million pre-tax in total over the past three years to work on its customer
remediation programs, including $1,249 million for customer refunds. $896 million pre-tax in provisions were made
this half ($617 million post-tax).
“We are centralising oversight of all remediation programs and have more than 400 employees working directly on
remediation projects to make refunds to customers as quickly as possible. Over the past 18 months, we have
repaid around $200 million to customers and we expect to make good progress this year in resolving key issues.
“To safeguard against future issues, work is underway across the Group to strengthen governance, improve
culture, and deliver more consistent customer outcomes. As part of our ‘get it right, put it right’ initiative we are
determined to fix issues and stop these errors occurring again. We will continue to review our products and
services to ensure they deliver the right outcomes for customers,” Mr Hartzer said.
Strong balance sheet
Margins well-managed
Common equity Tier 1 (CET1) capital ratio (%)
Net interest margin (NIM) (%)
• CET1 capital ratio little changed. Capital generation
offset remediation and wealth reset provisions.
• Liquidity ratios well above regulatory requirements
of 100%:
- Liquidity coverage ratio 138%.
- Net stable funding ratio 113%.
• Net interest margin (excluding Treasury & Markets)
down 12bps from prior corresponding period due to
provisions for customer refunds and higher short-term
funding costs.
• A 4bps decrease in Treasury & Markets primarily from
Treasury interest rate risk management.
9.1
9.0
9.5 9.5
10.6 10.6
10.6
Sep-13Sep-14Sep-15Sep-16Sep-17Sep-18Mar-19
Customer remediation costs
Results Announcement to the market
iv | Westpac Group 2019 Interim Financial Results Announcement
Expenses 2H18 to 1H19 ($m)
• Operating expenses increased 1% in the half, as major remediation and restructuring items increased by $162
million.
• Excluding major remediation and restructuring items, operating expenses declined 3%. This followed the exit
of Hastings with operating cost increases offset by $146 million in productivity savings.
• Full time equivalent staff reduced 2% over the half.
Credit quality
• Asset quality remains sound.
• Stressed exposures to TCE increased modestly by 1bp compared to March 2018.
• Impaired asset provision coverage steady at 46% over the half and the year.
Stressed exposures to total committed exposures (TCE) (%)
Results Announcement to the market
Westpac Group 2019 Interim Financial Results Announcement | v
Mortgage quality
• Mortgage book
fundamentally
sound.
• 90+ day
delinquencies up
10bps over the half.
• 482 properties in
possession out of a
portfolio of about 1.6
million loans.
Divisional performance – cash earnings
Division
1H19
($m)
%
change
1H18
%
change
2H18
Highlights (1H19 – 1H18)
Consumer
Bank
1,514
(11)
7
Cash earnings were 11% lower from a decline in net interest margin,
due to higher wholesale funding costs and lower mortgage spreads.
Expenses were up from a rise in regulatory and compliance costs and
higher investment spending.
Business
Bank
1,013
(6)
(6)
Cash earnings were impacted by provisions for estimated customer
refunds, payments and associated costs ($131 million after tax).
Excluding these items, cash earnings were $64 million or 6% higher
from disciplined margin management and a 49% reduction in
impairment charges.
BT
Financial
Group
(305)
large
large
BTFG reported a cash earnings loss of $305 million. Excluding major
remediation and restructuring items ($620 million after tax
5
), cash
earnings were down $315 million, down 22% (or $91 million). This was
primarily due to higher weather
-related insurance claims and margin
compression related to the removal of grandfathered payments and
platforms repricing.
Westpac
Institutional
Bank
543
(2)
1
Lower cash earnings were primarily due to a reduction in financial
markets revenue and a first half 2019 impairment charge compared to
an impairment benefit in first half 2018.
Net interest income was up 8% and net interest margin up 7bps
reflecting disciplined balance sheet management.
Westpac
New Zealand
($NZ)
555
15
4
Cash earnings growth was supported by sound balance sheet growth
(loans and deposits both up 4%), resulting in higher operating income,
which included the profit and sale of an associate. A $24 million
reduction in impairment charges also supported growth.
5
Major remediation and restructuring items for BTFG include provisions for estimated customer refunds, payments and associated costs ($484 million
after tax), and costs associated with the restructuring of the Wealth business ($136 million after tax).
0.0
1.0
2.0
3.0
Mar-15Mar-16Mar-17Mar-18Mar-19
90+ day past due total90+ day past due investor
30+ day past due total
Australian mortgage portfolio delinquencies (%)
Introduced new hardship treatment
Results Announcement to the market
vi | Westpac Group 2019 Interim Financial Results Announcement
The Westpac Group Board has determined an unchanged interim dividend of 94 cents per share to be paid on 24
June 2019.
The dividend reinvestment plan (DRP) will continue to operate and a 1.5% discount will apply to the market price.
Shares will be issued to satisfy the DRP. The discount to the DRP market price has been applied to give the
Group additional capital flexibility, including for regulatory changes to the measurement of capital and risk
weighted assets likely to be announced in Second Half 2019.
The Federal Government bank levy cost Westpac $193 million pre-tax for the six months. The levy is equivalent to
4 cents per share.
Mr Hartzer said the Australian economy will remain subdued with GDP growth this year expected to hold at around
2.2%.
He said consumers were being more cautious in the face of flat wages growth and a continuing soft housing
market.
“The economy will continue to be supported by strong government investment and exports, in both resources and
services. Employment growth is likely to slow while inflation is likely to remain low.
“The uncertain international backdrop is weighing on business investment decisions. Chinese authorities are
addressing last year’s sharp slowdown while markets are cautious about the outlook for the US. Europe’s
economy remains soft.
“House prices are likely to remain soft and home building is set to reduce through 2019 and into 2020.
“We expect system housing credit growth to slow to 3% in the current bank year and fall further next year to 2.5%.
“That would imply total credit growth slowing to 3% this year and 2.8% next year.
“We are dealing decisively with a difficult commercial environment for banks, delivering productivity savings while
we continue to simplify our products, digitise our business, and modernise our platforms.
“We are implementing the recommendations of the Royal Commission and other industry initiatives while
continuing to invest in technology and digital platforms. Although the second half will continue to be challenging,
we believe our service-led strategy remains the best way to create value for our shareholders,” Mr Hartzer said.
To view Mr Hartzer’s 1H19 results video on Westpac Wire, please visit https://www.westpac.com.au/news/making-
news/2019/05/hartzer-decisive-action-in-difficult-times/
For further information
David Lording
Head of Media Relations
M. 0419 683 411
Andrew Bowden
Head of Investor Relations
T. 02 8253 4008
M. 0438 284 863
Dividends
Outlook
Results Announcement to the market
Westpac Group 2019 Interim Financial Results Announcement | vii
Results Announcement to the market
Westpac Group 2019 Interim Financial Results Announcement | 1
Index
01 Group results
1.1 Reported results
1.2 Key financial information
1.3 Cash earnings results
1.4 Market share and system multiple metrics
2
2
4
5
10
02 Review of Group operations
2.1 Performance overview
2.2 Review of earnings
2.3 Credit quality
2.4 Balance sheet and funding
2.5 Capital and dividends
2.6 Sustainability performance
11
15
23
38
41
46
52
03 Divisional results
3.1 Consumer Bank
3.2 Business Bank
3.3 BT Financial Group (Australia)
3.4 Westpac Institutional Bank
3.5 Westpac New Zealand
3.6 Group Businesses
57
58
61
64
69
72
74
04 2019 Interim Financial Report
4.1 Directors’ report
4.2 Consolidated income statement
4.3 Consolidated statement of comprehensive income
4.4 Consolidated balance sheet
4.5 Consolidated statement of changes in equity
4.6 Consolidated cash flow statement
4.7 Notes to the consolidated financial statements
4.8 Statutory statements
77
77
105
106
107
108
109
110
153
05 Cash earnings financial information
156
06 Other information
6.1 Disclosure regarding forward-looking statements
6.2 References to websites
6.3 Credit ratings
6.4 Dividend reinvestment plan
6.5 Changes in control of Group entities
6.6 Financial calendar and Share Registry details
6.7 Exchange rates
168
168
169
169
169
169
170
173
07 Glossary
175
In this Interim Financial Results Announcement (Results Announcement) references to ‘Westpac’, ‘WBC’, ‘Westpac Group’, ‘the Group’,
‘we’, ‘us’ and ‘our’ are to Westpac Banking Corporation and its controlled entities, unless it clearly means just Westpac Banking
Corporation.
All references to $ in this Results Announcement are to Australian dollars unless otherwise stated.
Financial calendar
Interim Results Announcement released 6 May 2019
Ex-dividend date for interim dividend 16 May 2019
Record date for interim dividend (Sydney) 17 May 2019
Interim dividend payable 24 June 2019
Final Results Announcement (scheduled) 4 November 2019
2019 Interim financial results
Group results
2 | Westpac Group 2019 Interim Financial Results Announcement
1.0 Group results
1.1 Reported results
1
Reported net profit attributable to owners of Westpac Banking Corporation is prepared in accordance with the
requirements of Australian Accounting Standards (AAS) and regulations applicable to Australian Authorised
Deposit-taking Institutions (ADIs). During First Half 2019, Westpac adopted AASB 9 Financial Instruments (AASB
9) and AASB 15 Revenue from Contracts with Customers (AASB 15). As the Group chose to apply the standards
prospectively, comparatives have not been restated.
Adopting the new standards has resulted in measurement and classification differences between First Half 2019
and prior periods. The significant differences are:
• the measurement of credit loss provision and impairment charges are now on an expected loss basis;
• line fees (mainly Business Bank) are now recognised in net interest income, previously recognised in net fee
income;
• interest on performing loans is now measured on the gross loan value. Previously, interest was recognised on
the loan balance net of impairment provision; and
• certain items previously netted are now presented on a gross basis, including payments from credit card
schemes which were previously netted against related expenditure.
The changes have little impact on net profit but do impact individual line items. As these changes have only been
applied from 1 October 2018, it is difficult to compare line items across periods. These changes are discussed
further in Note 1 of the 2019 Interim Financial Report.
% Mov't
2
% Mov't
2
Half Year Half Year Half Year Mar 19 - Mar 19 -
$m March 19 Sept 18 March 18 Sept 18 Mar 18
Net interest income
8,263 8,227 8,278 - -
Net fee income
826
1,146 1,278 (28) (35)
Net wealth management and insurance income
326
1,110 951 (71) (66)
Trading income
437
458 487 (5) (10)
Other income
127
(17) 89 large 43
Net operating income before operating expenses
and impairment charges
9,979 10,924 11,083
(9) (10)
Operating expenses
(5,091) (4,911) (4,655) 4 9
Net profit before impairment charges and
income tax expense
4,888 6,013 6,428
(19) (24)
Impairment charges
(333) (317) (393) 5 (15)
Profit before income tax
4,555 5,696 6,035
(20) (25)
Income tax expense
(1,379) (1,797) (1,835) (23) (25)
Net profit for the period
3,176 3,899 4,200
(19) (24)
Net profit attributable to non-controlling interests
(3) (2) (2) 50 50
Net profit attributable to owners of Westpac
Banking Corporation
3,173 3,897 4,198
(19) (24)
1
The Group has adopted AASB 9 Financial Instruments and AASB 15 Revenue from Contracts with Customers from 1 October 2018.
Statutory comparatives have not been restated. Refer to Note 1 in Section 4 for further detail. However, where applicable, cash
earnings comparatives (excluding expected credit loss provisioning) have been restated to aid comparability. Refer to the cash
earnings policy in Section 1.3.4 for further detail. In addition, during First Half 2019, the Group has made a number of presentational
changes to the Balance Sheet and Income Statement. Both statutory and cash earnings comparatives have been restated. Refer to
Note 1 in Section 4 for further detail.
2
Percentage movement represents an increase / (decrease) to the relevant comparative period.
2019 Interim financial results
Group results
Westpac Group 2019 Interim Financial Results Announcement | 3
Net profit attributable to owners of Westpac Banking Corporation for First Half 2019 was $3,173 million, a
decrease of $1,025 million or 24% compared to First Half 2018. First Half 2019 included significant provisions for
estimated customer refunds, payments and associated costs, and costs associated with the restructuring of the
Wealth business, which together reduced net profit after tax by $753 million. These items are discussed further in
Section 1.3.2 and Section 2.1 and in Note 14 of the 2019 Interim Financial Report.
Net interest income decreased $15 million compared to First Half 2018. Average interest-earning assets grew 4%
mostly from total loan growth but this was more than offset by a net interest margin decrease of 7 basis points to
2.09%. The movement in net interest income included:
• $212 million of provisions for estimated customer refunds and payments;
• a net reduction from economic hedges of $123 million; and
• lower revenue from our Treasury division outweighed the growth in other divisions; offset by
• an increase of $330 million due to the reclassification of line fees from net fee income to interest income.
Net interest income, loans, deposits and other borrowings and net interest margin are discussed further in
Sections 2.2.1 to 2.2.4.
Net fee income decreased $452 million or 35% compared to First Half 2018 primarily due to the reclassification of
line fees to net interest income and a $165 million impact of provisions for estimated customer refunds and
payments.
Net wealth management and insurance income decreased $625 million or 66% compared to First Half 2018
primarily due to additional provisions for estimated customer refunds and payments of $435 million, higher general
insurance claims and lower wealth management income due to changes in pricing structure, the cessation of
grandfathered commissions and the exit of Hastings in Second Half 2018.
Trading income decreased $50 million or 10% due to lower income in the markets business.
Other income increased $38 million or 43% mainly due to the profit on sale of an associate.
Net fee income, net wealth management and insurance income, trading income and other income are discussed
further in Section 2.2.5.
Operating expenses increased $436 million or 9% compared to First Half 2018. The rise was mainly due to:
• $84 million of provisions for estimated costs associated with implementing customer refunds and payments;
• $190 million of provisions for the restructuring of the Wealth business; and
• $162 million increase in other costs including $97 million of higher costs associated with the Group’s
investment program, largely across banking and wealth platforms.
Operating expenses are discussed further in Section 2.2.8.
Impairment charges were $60 million or 15% lower compared to First Half 2018. Asset quality remained sound,
with stressed exposures as a percentage of total committed exposures at 1.10%, up 1 basis point compared to
First Half 2018. Impairment charges are discussed further in Section 2.2.9.
The effective tax rate of 30.3% was lower than the First Half 2018 effective tax rate of 30.4%. Income tax expense
is discussed further in Section 2.2.10.
2019 Interim financial results
Group results
4 | Westpac Group 2019 Interim Financial Results Announcement
1.2 Key financial information
1
% Mov't % Mov't
Half Year Half Year Half Year Mar 19 - Mar 19 -
March 19 Sept 18 March 18 Sept 18 Mar 18
Shareholder value
Earnings per ordinary share (cents)
92.3 113.8 123.7 (19) (25)
Weighted average ordinary shares (millions)
2
3,436 3,421 3,392 - 1
Fully franked dividends per ordinary share (cents)
94 94 94 - -
Return on average ordinary equity
10.05% 12.34% 13.79% (229bps) (374bps)
Average ordinary equity ($m)
63,348 62,978 61,051 1 4
Average total equity ($m)
63,400 63,026 61,065 1 4
Net tangible asset per ordinary share ($)
15.12 15.39 15.00 (2) 1
Business performance
Interest spread
1.89% 1.92% 2.00% (3bps) (11bps)
Benefit of net non-interest bearing assets,
liabilities and equity
0.20% 0.18% 0.16% 2bps 4bps
Net interest margin
2.09% 2.10% 2.16% (1bps) (7bps)
Average interest-earning assets ($m)
794,660 782,834 767,011 2 4
Expense to income ratio
51.02% 44.96% 42.00% large large
Capital, funding and liquidity
Common equity Tier 1 capital ratio
- APRA Basel III
10.64% 10.63% 10.50% 1bps 14bps
- Internationally comparable
3
16.17% 16.14% 16.13% 3bps 4bps
Credit risk weighted assets (credit RWA) ($m)
362,762 362,749 361,391 - -
Total risk weighted assets (RWA) ($m)
419,819 425,384 415,744 (1) 1
Liquidity coverage ratio (LCR)
138% 133% 134% large 351bps
Net stable funding ratio (NSFR)
113% 114% 112% (54bps) 81bps
Asset quality
Gross impaired exposures to gross loans
0.24% 0.20% 0.22% 4bps 2bps
Gross impaired exposures to equity and total provisions
2.57% 2.09% 2.33% 48bps 24bps
Gross impaired exposures provisions to
gross impaired exposures
45.74% 46.12% 45.54% (38bps) 20bps
Total committed exposures (TCE) ($m)
1,046,776 1,038,006 1,023,017 1 2
Total stressed exposures as a % of TCE
1.10% 1.08% 1.09% 2bps 1bps
Total loan provisions to gross loans
56bps 43bps 45bps 13bps 11bps
Mortgages 90+ day delinquencies
0.75% 0.67% 0.65% 8bps 10bps
Other consumer loans 90+ day delinquencies
1.80% 1.64% 1.64% 16bps 16bps
Collectively assessed provisions to credit RWA
98bps 73bps 75bps 25bps 23bps
Balance sheet ($m)
4
Loans
714,297 709,690 701,393 1 2
Total assets
891,062 879,592 871,855 1 2
Deposits and other borrowings
555,007 559,285 547,736 (1) 1
Total liabilities
827,127 815,019 809,190 1 2
Total equity
63,935 64,573 62,665 (1) 2
Wealth Management
Average Group funds ($bn)
5
207.3 217.3 217.3 (5) (5)
Life insurance in-force premiums (Australia) ($m)
1,259 1,277 1,276 (1) (1)
General insurance gross written premiums (Australia) ($m)
259 252 251 3 3
1
The Group has adopted AASB 9 Financial Instruments and AASB 15 Revenue from Contracts with Customers from 1 October 2018.
Statutory comparatives have not been restated. Refer to Note 1 in Section 4 for further detail. However, where applicable, cash
earnings comparatives (excluding expected credit loss provisioning) have been restated to aid comparability. Refer to the cash
earnings policy in Section 1.3.4 for further detail. In addition, during First Half 2019, the Group has made a number of presentational
changes to the Balance Sheet and Income Statement. Both statutory and cash earnings comparatives have been restated. Refer to
Note 1 in Section 4 for further detail.
2
Weighted average number of fully paid ordinary shares listed on the ASX for the relevant period less average Westpac shares held by
the Group (“Treasury shares”).
3
Refer Glossary for definition.
4
Spot balances.
5
Averages are based on a six month period.
2019 Interim financial results
Group results
Westpac Group 2019 Interim Financial Results Announcement | 5
1.3 Cash earnings results
1
Throughout this Results Announcement, reporting and commentary of financial performance refers to ‘cash
earnings results’, unless otherwise stated. Section 4 is prepared on a reported basis. A reconciliation of cash
earnings to reported results is set out in Section 5, Note 8.
Certain commentary throughout this Results Announcement refers to performance excluding “notable items”.
Details on notable items are discussed in Section 1.3.2.
% Mov't % Mov't
Half Year Half Year Half Year Mar 19 - Mar 19 -
$m March 19 Sept 18 March 18 Sept 18 Mar 18
Net interest income
8,389 8,470 8,717 (1) (4)
Non-interest income
1,714 2,456 2,522 (30) (32)
Net operating income
10,103 10,926 11,239 (8) (10)
Operating expenses
(5,041) (5,007) (4,691) 1 7
Core earnings
5,062 5,919
6,548
(14) (23)
Impairment charges
(333) (368) (444) (10) (25)
Operating profit before income tax
4,729 5,551
6,104
(15) (23)
Income tax expense
(1,430) (1,735) (1,851) (18) (23)
Net profit
3,299 3,816
4,253
(14) (22)
Net profit attributable to non-controlling interests
(3) (2) (2) 50 50
Cash earnings
3,296 3,814
4,251
(14) (22)
Add back notable items
753 281 - 168 -
Cash earnings excluding notable items
4,049 4,095
4,251
(1) (5)
1
The Group has adopted AASB 9 Financial Instruments and AASB 15 Revenue from Contracts with Customers from 1 October 2018.
Statutory comparatives have not been restated. Refer to Note 1 in Section 4 for further detail. However, where applicable, cash
earnings comparatives (excluding expected credit loss provisioning) have been restated to aid comparability. Refer to the cash
earnings policy in Section 1.3.4 for further detail. In addition, during First Half 2019, the Group has made a number of presentational
changes to the Balance Sheet and Income Statement. Both statutory and cash earnings comparatives have been restated. Refer to
Note 1 in Section 4 for further detail.
2019 Interim financial results
Group results
6 | Westpac Group 2019 Interim Financial Results Announcement
1.3.1 Key financial information – cash earnings basis
1
% Mov't % Mov't
Half Year Half Year Half Year Mar 19 - Mar 19 -
March 19 Sept 18 March 18 Sept 18 Mar 18
Shareholder value
Cash earnings per ordinary share (cents)
95.8 111.2 125.0 (14) (23)
Economic profit ($m)
2
660 1,395 2,049 (53) (68)
Weighted average ordinary shares (millions)
3
3,442 3,429 3,400 - 1
Dividend payout ratio
4
98.33% 84.66% 75.28% large large
Cash earnings on average ordinary equity (ROE)
10.43% 12.08% 13.96% (165bps) (353bps)
Cash earnings on average tangible ordinary equity (ROTE)
12.30% 14.27% 16.60% (197bps) large
Average ordinary equity ($m)
63,348 62,978 61,051 1 4
Average tangible ordinary equity ($m)
5
53,748 53,327 51,344 1 5
Business performance
Interest spread
1.92% 1.98% 2.11% (6bps) (19bps)
Benefit of net non-interest bearing assets, liabilities and equity
0.20% 0.18% 0.17% 2bps 3bps
Net interest margin
2.12% 2.16% 2.28% (4bps) (16bps)
Average interest-earning assets ($m)
794,660 782,834 767,011 2 4
Expense to income ratio
49.90% 45.83% 41.74% large large
Full time equivalent employees (FTE)
34,241 35,029 35,720 (2) (4)
Revenue per FTE ($ '000's)
294 309 317 (5) (7)
Effective tax rate
30.24% 31.26% 30.32% (102bps) (8bps)
Impairment charges
Loan impairment charges to average loans annualised
9bps 10bps 13bps (1bps) (4bps)
Net write-offs to average loans annualised
12bps 14bps 13bps (2bps) (1bps)
1
The Group has adopted AASB 9 Financial Instruments and AASB 15 Revenue from Contracts with Customers from 1 October 2018.
Statutory comparatives have not been restated. Refer to Note 1 in Section 4 for further detail. However, where applicable, cash
earnings comparatives (excluding expected credit loss provisioning) have been restated to aid comparability. Refer to the cash
earnings policy in Section 1.3.4 for further detail. In addition, during First Half 2019, the Group has made a number of presentational
changes to the Balance Sheet and Income Statement. Both statutory and cash earnings comparatives have been restated. Refer to
Note 1 in Section 4 for further detail.
2
Refer to Section 5, Note 9 for further details.
3
Weighted average ordinary shares – cash earnings: represents the weighted average number of fully paid ordinary shares listed on
the ASX for the relevant period.
4
The dividend payment ratio for Half Year March 2018 was based on the number of shares on issue as at 31 March 2018. On 3 April
2018, some Convertible Preference Shares (CPS) converted into ordinary shares. Inclusion of these shares would have resulted in a
dividend payout ratio of 75.70%.
5
Average tangible ordinary equity is calculated as average ordinary equity less goodwill and other intangible assets (excluding
capitalised software).
2019 Interim financial results
Group results
Westpac Group 2019 Interim Financial Results Announcement | 7
1.3.2 Impact of notable items
The table below summarises the impact of notable items on First Half 2019 and Second Half 2018 financial
results. Cash earnings and individual line items for First Half 2019 were impacted by additional provisions for
estimated customer refunds, payments and associated costs (operating profit before tax was impacted
$896 million, which reduced net interest income $212 million, non-interest income $600 million and increased
operating expenses $84 million). Cash earnings and operating expenses for First Half 2019 were also impacted by
an increase in operating costs associated with the restructuring of the Wealth business ($190 million). These
remediation and restructuring costs are referred to as ‘notable items’ through the document.
Half Year Half Year Half Year
March 19 Sept 18 March 18
Estimated
customer
Estimated
customer
Estimated
customer
refunds, refunds, refunds,
payments Wealth payments payments
$m and costs Restructuring Total and costs and costs
Net interest income
(212) - (212) (105) -
Net fee income
(165) - (165) (157) -
Net wealth management and insurance
income (435) - (435) (6) -
Non-interest income
(600) - (600) (163) -
Net operating income
(812) - (812) (268)
-
Operating expenses
(84) (190) (274) (112) -
Operating profit before tax
(896) (190)
(1,086
) (380) -
Income tax expense
279 54 333 99 -
Cash earnings
(617) (136) (753) (281) -
1.3.3 Key financial information – cash earnings basis excluding the impact of notable items
% Mov't % Mov't
Half Year Half Year Half Year Mar 19 - Mar 19 -
March 19 Sept 18 March 18 Sept 18 Mar 18
Cash earnings per ordinary share (cents)
1
117.6 119.4 125.0 (2) (6)
Cash earnings on average ordinary equity (ROE)
1
12.82% 12.97% 13.96% (15bps) (114bps)
Net interest margin
1
2.17% 2.18% 2.28% (1bps) (11bps)
Expense to income ratio
1
43.67% 43.73% 41.74% (6bps) 193bps
1
Calculated using cash earnings adjusted for the impact of notable items.
2019 Interim financial results
Group results
8 | Westpac Group 2019 Interim Financial Results Announcement
1.3.4 Cash earnings policy
In assessing financial performance, including divisional results, Westpac Group uses a measure of performance
referred to as ‘cash earnings’. Cash earnings is viewed as a measure of the level of profit that is generated by
ongoing operations and is therefore considered in assessing distributions, including dividends. Cash earnings is
neither a measure of cash flow nor net profit determined on a cash accounting basis, as it includes both cash and
non-cash adjustments to statutory net profit.
Management believes this allows the Group to more effectively assess performance for the current period against
prior periods and to compare performance across business divisions and across peer companies.
To determine cash earnings, three categories of adjustments are made to reported results:
• Material items that key decision makers at the Westpac Group believe do not reflect the Group’s operating
performance;
• Items that are not considered when dividends are recommended, such as the amortisation of intangibles,
impact of Treasury shares and economic hedging impacts; and
• Accounting reclassifications between individual line items that do not impact reported results.
A full reconciliation of reported results to cash earnings is set out in Section 5, Note 8.
Reconciliation of reported results to cash earnings and cash earnings excluding notable items
% Mov't % Mov't
Half Year Half Year Half Year Mar 19 - Mar 19 -
$m March 19 Sept 18 March 18 Sept 18 Mar 18
NET PROFIT ATTRIBUTABLE TO OWNERS OF
WESTPAC BANKING CORPORATION
3,173 3,897
4,198
(19) (24)
Amortisation of intangible assets
- - 17 - (100)
Fair value (gain)/loss on economic hedges
125 (163) 37 large large
Ineffective hedges
(5) 4 9 large large
Adjustments related to Pendal (previously BTIM)
5 73 - (93) -
Treasury shares
(2) 3 (10) large (80)
Total cash earnings adjustments (post-tax)
123 (83)
53
large 132
Cash earnings
3,296
3,814
4,251
(14) (22)
Add back notable items
753 281 - 168 -
Cash earnings excluding notable items
4,049 4,095
4,251
(1) (5)
Outlined below are the cash earnings adjustments to the reported result:
• Amortisation of intangible assets: Identifiable intangible assets arising from business acquisitions are amortised
over their useful lives, ranging between four and twenty years. This amortisation (excluding capitalised
software) is a cash earnings adjustment because it is a non-cash flow item and does not affect cash
distributions available to shareholders. The last of these intangible assets were fully amortised in December
2017;
• Fair value on economic hedges (which do not qualify for hedge accounting under AAS) comprise:
- The unrealised fair value (gain)/loss on foreign exchange hedges of future New Zealand earnings impacting
non-interest income is reversed in deriving cash earnings as they may create a material timing difference on
reported results but do not affect the Group’s cash earnings over the life of the hedge; and
- The unrealised fair value (gain)/loss on hedges of accrual accounted term funding transactions are reversed
in deriving cash earnings as they may create a material timing difference on reported results but do not affect
the Group’s cash earnings over the life of the hedge.
• Ineffective hedges: The unrealised (gain)/loss on ineffective hedges is reversed in deriving cash earnings
because the gain or loss arising from the fair value movement in these hedges reverses over time and does not
affect the Group’s profits over time;
2019 Interim financial results
Group results
Westpac Group 2019 Interim Financial Results Announcement | 9
• Adjustments related to Pendal (previously BTIM): Consistent with prior periods’ treatment, this item has been
treated as a cash earnings adjustment given its size and that it does not reflect ongoing operations. The Group
has indicated that it may sell the remaining 10% shareholding in Pendal at some future date. From September
2018, this adjustment relates to the mark to market of the shares and separation costs related to the original
sell down. Any future gain or loss on this shareholding will similarly be excluded from the calculation of cash
earnings;
• Treasury shares: Under AAS, Westpac shares held by the Group in the managed funds and life businesses are
deemed to be Treasury shares and the results of holding these shares cannot be recognised in the reported
results. In deriving cash earnings, these results are included to ensure there is no asymmetrical impact on the
Group’s profits because the Treasury shares support policyholder liabilities and equity derivative transactions
which are re-valued in determining income; and
• Accounting reclassifications between individual line items that do not impact reported results comprise:
- Policyholder tax recoveries: Income and tax amounts that are grossed up to comply with the AAS covering
Life Insurance Business (policyholder tax recoveries) are reversed in deriving income and taxation expense
on a cash earnings basis; and
- Operating leases: Under AAS rental income on operating leases is presented gross of the depreciation of the
assets subject to the lease. These amounts are offset in deriving non-interest income and operating
expenses on a cash earnings basis.
Full Year 2018 Revisions
For Westpac, AASB 9 and AASB 15 were adopted on 1 October 2018 and as comparatives were not restated, line
item movements in our reported results are not directly comparable across periods. In order to provide the
operational trends in business, we have revised the 2018 cash earnings comparatives as if the standards applied
on 1 October 2017, except for expected credit loss provisioning which is not feasible. These adjustments do not
impact Full Year 2018 cash earnings but affect individual line items. These adjustments are detailed in Note 8 in
Section 5. These adjustments are comprised of:
• Line fees: The Group has reclassified line fees (mostly Business Bank) from non-interest income to net interest
income to more appropriately reflect the relationship with drawn lines of credit;
• Other fees and expenses: The Group has restated the classification of a number of fees and expenses. This
has resulted in the grossing up of net interest income, non-interest income, impairment charges and operating
expenses;
• Card scheme: Support payments received from Mastercard and Visa have been reclassified to non-interest
income and related expenses have been reclassified to operating expenses;
• Merchant terminal costs: Some variable costs related to Westpac’s merchant terminal business have been
reclassified between non-interest income and operating expenses; and
• Interest carrying adjustment: Interest on performing loans (stage 1 and stage 2 loans) is now measured on the
gross loan value. Previously, interest on performing loans was recognised on the loan balance net of
provisions. This adjustment increases interest income and impairment charges.
The guidance provided in Australian Securities and Investments Commission (ASIC) Regulatory Guide 230 has
been followed when presenting this information.
This Results Announcement is unaudited
PricewaterhouseCoopers have reviewed the financial statements contained within Section 4 of this Results
Announcement and have issued an unmodified review report. All other sections, including the Directors’ Report in
Section 4 of the Results Announcement have not been subject to review by PricewaterhouseCoopers. The
financial information contained in this Results Announcement includes information extracted from the reviewed
fin ancial statements together with information that has not been reviewed. The cash earnings disclosed as part of
this Results Announcement have not been separately reviewed by PricewaterhouseCoopers.
2019 Interim financial results
Group results
10 | Westpac Group 2019 Interim Financial Results Announcement
1.4 Market share and system multiple metrics
1.4.1 Market share
As at As at As at
31 March 30 Sept 31 March
2019 2018 2018
Australia
Banking system (APRA)
1
Housing credit
2
24% 24% 25%
Cards
23% 23% 23%
Household deposits
23% 23% 23%
Business deposits
20% 20% 20%
Financial system (RBA)
3
Housing credit
2
23% 23% 23%
Business credit
18% 19% 19%
Retail deposits
4
21% 22% 21%
New Zealand (RBNZ)
5,6
Consumer lending
18% 19% 19%
Deposits
19% 18% 19%
Business lending
17% 16% 16%
Australian Wealth Management
7
Platforms (includes Wrap and Corporate Super)
18% 19% 18%
Retail (excludes Cash)
17% 18% 18%
Corporate Super
13% 13% 13%
1.4.2 System multiples
Half Year Half Year Half Year
March 19 Sept 18 March 18
Australia
Banking system (APRA)
1
Housing credit
2
0.5 0.9 1.0
Cards
8
n/a n/a n/a
Household deposits
0.1 1.1 0.8
Business deposits
8
0.1 n/a 0.9
Financial system (RBA)
3
Housing credit
2
0.5 0.8 0.9
Business credit
8
n/a 0.6 0.9
Retail deposits
4,8
n/a 1.3 0.6
New Zealand (RBNZ)
5,6
Consumer lending
0.4 0.6 0.7
Deposits
1.4 0.1 1.2
1
Source: Australian Prudential Regulation Authority (APRA).
2
Includes securitised loans.
3
Source: Reserve Bank of Australia (RBA).
4
Retail deposits as measured by the RBA, financial system includes financial corporations’ deposits.
5
New Zealand comprises New Zealand banking operations.
6
Source: Reserve Bank of New Zealand (RBNZ).
7
Market Share Funds under Management / Funds under Administration based on published market share statistics from Strategic
Insight as at 31 December 2018 (for First Half 2019), as at 30 June 2018 (for Second Half 2018) and as at 31 December 2017 (for
First Half 2018) and represents the BT Wealth business market share reported at these times.
8
n/a indicates that system growth or Westpac growth was negative.
2019 Interim financial results
Review of Group operations
Westpac Group 2019 Interim Financial Results Announcement | 11
2.0 Review of Group operations
Divisional cash earnings summary
1
Half Year March 19
BT Financial Westpac Westpac
Consumer Business Group Institutional New Zealand
2
Group
$m Bank Bank (Australia) Bank (A$) Businesses
Group
Net interest income 3,882 2,223 297 743 945 299
8,389
Non-interest income 359 287 142 682 234 10
1,714
Net operating income 4,241 2,510 439 1,425 1,179 309
10,103
Operating expenses (1,821) (988) (872) (654) (454) (252)
(5,041)
Core earnings 2,420 1,522 (433) 771 725 57
5,062
Impairment (charges) / benefits (268) (75) 1 (15) (13) 37
(333)
Operating profit before income tax 2,152 1,447 (432) 756 712 94
4,729
Income tax expense (638) (434) 127 (210) (188) (87)
(1,430)
Net profit 1,514 1,013 (305) 546 524 7
3,299
Non-controlling interests - - - (3) - -
(3)
Cash earnings 1,514 1,013 (305) 543 524 7
3,296
Add back notable items 2 131 620 - - -
753
Cash earnings excluding notable items 1,516 1,144 315 543 524 7
4,049
Half Year Sept 18
BT Financial Westpac Westpac
Consumer Business Group Institutional New Zealand
2
Group
$m Bank Bank (Australia) Bank (A$) Businesses
Group
Net interest income 3,760 2,362 302 754 917 375
8,470
Non-interest income 392 315 735 812 181 21
2,456
Net operating income 4,152 2,677 1,037 1,566 1,098 396
10,926
Operating expenses (1,883) (967) (682) (771) (429) (275)
(5,007)
Core earnings 2,269 1,710 355 795 669 121
5,919
Impairment (charges) / benefits (236) (164) (4) 9 13 14
(368)
Operating profit before income tax 2,033 1,546 351 804 682 135
5,551
Income tax expense (620) (466) (110) (264) (188) (87)
(1,735)
Net profit 1,413 1,080 241 540 494 48
3,816
Non-controlling interests - - - (2) - -
(2)
Cash earnings 1,413 1,080 241 538 494 48
3,814
Add back notable items 110 5 141 - 12 13
281
Cash earnings excluding notable items 1,523 1,085 382 538 506 61
4,095
Mov't Mar 19 - Sept 18
BT Financial Westpac Westpac
Consumer Business Group Institutional New Zealand
2
Group
% Bank Bank (Australia) Bank (A$) Businesses
Group
Net interest income 3% (6%) (2%) (1%) 3% (20%)
(1%)
Non-interest income (8%) (9%) (81%) (16%) 29% (52%)
(30%)
Net operating income 2% (6%) (58%) (9%) 7% (22%)
(8%)
Operating expenses (3%) 2% 28% (15%) 6% (8%)
1%
Core earnings
7% (11%) large (3%) 8% (53%)
(14%)
Impairment (charges) / benefits 14% (54%) large large large 164%
(10%)
Operating profit before income tax
6% (6%) large (6%) 4% (30%)
(15%)
Income tax expense 3% (7%) large (20%) - -
(18%)
Net profit
7% (6%) large 1% 6% (85%)
(14%)
Non-controlling interests - - - 50% - -
50%
Cash earnings
7% (6%) large 1% 6% (85%)
(14%)
Add back notable items (98%) large large - (100%) (100%)
168%
Cash earnings excluding notable items
- 5% (18%) 1% 4% (89%)
(1%)
1
The Group has adopted AASB 9 Financial Instruments and AASB 15 Revenue from Contracts with Customers from 1 October 2018.
Statutory comparatives have not been restated. Refer to Note 1 in Section 4 for further detail. However, where applicable, cash
earnings comparatives (excluding expected credit loss provisioning) have been restated to aid comparability. Refer to the Cash
earnings policy in Section 1.3.4 for further detail. In addition, during First Half 2019, the Group has made a number of presentational
changes to the Balance Sheet and Income Statement. Both statutory and cash earnings comparatives have been restated. Refer to
Note 1 in Section 4 for further detail.
2
Refer to Section 3.5 for the Westpac New Zealand NZ$ divisional result.
2019 Interim financial results
Review of Group operations
12 | Westpac Group 2019 Interim Financial Results Announcement
Movement in cash earnings ($m)
First Half 2019 – Second Half 2018
281
26
128
35
70
1H19
notable
items
1H19 cash
earnings
ex notable
items
2H18 cash
earnings
(305)
Tax & non-
controlling
interests
Non-
interest
income
Net interest
income
Impairment
charges
2H18 cash
earnings
ex notable
items
(753)
Operating
expenses
4,049
Add back
2H18
notable
items
3,814
4,095
3,296
1H19 cash
earnings
-518
Movement in core earnings by division ($m)
First Half 2019 – Second Half 2018
380
23
40
Westpac
New
Zealand
(A$)
(1,086)
(78)
1H19 core
earnings
ex notable
items
1H19 core
earnings
5,062
1H19
notable
items
BTFGBusiness
Bank
(5)
Consumer
Bank
2H18 core
earnings
ex notable
items
(24)
5,919
6,299
6,148
WIBAdd back
2H18
notable
items
(107)
Group
Businesses
2H18 core
earnings
-857
2019 Interim financial results
Review of Group operations
Westpac Group 2019 Interim Financial Results Announcement | 13
Divisional cash earnings summary (continued)
1
Half Year March 19
BT Financial Westpac Westpac
Consumer Business Group Institutional New Zealand
2
Group
$m Bank Bank (Australia) Bank (A$) Businesses
Group
Net interest income 3,882 2,223 297 743 945 299
8,389
Non-interest income 359 287 142 682 234 10
1,714
Net operating income 4,241 2,510 439 1,425 1,179 309
10,103
Operating expenses (1,821) (988) (872) (654) (454) (252)
(5,041)
Core earnings 2,420 1,522 (433) 771 725 57
5,062
Impairment (charges) / benefits (268) (75) 1 (15) (13) 37
(333)
Operating profit before income tax 2,152 1,447 (432) 756 712 94
4,729
Income tax expense (638) (434) 127 (210) (188) (87)
(1,430)
Net profit 1,514 1,013 (305) 546 524 7
3,299
Non-controlling interests - - - (3) - -
(3)
Cash earnings 1,514 1,013 (305) 543 524 7
3,296
Add back notable items 2 131 620 - - -
753
Cash earnings excluding notable items 1,516 1,144 315 543 524 7
4,049
Half Year March 18
BT Financial Westpac Westpac
Consumer Business Group Institutional New Zealand
2
Group
$m Bank Bank (Australia) Bank (A$) Businesses
Group
Net interest income 4,089 2,328 294 688 882 436
8,717
Non-interest income 370 311 881 753 192 15
2,522
Net operating income 4,459 2,639 1,175 1,441 1,074 451
11,239
Operating expenses (1,766) (948) (590) (678) (426) (283)
(4,691)
Core earnings 2,693 1,691 585 763 648 168
6,548
Impairment (charges) / benefits (250) (148) (4) 6 (35) (13)
(444)
Operating profit before income tax 2,443 1,543 581 769 613 155
6,104
Income tax expense (734) (463) (175) (212) (173) (94)
(1,851)
Net profit 1,709 1,080 406 557 440 61
4,253
Non-controlling interests - - - (3) - 1
(2)
Cash earnings 1,709 1,080 406 554 440 62
4,251
Add back notable items - - - - - -
-
Cash earnings excluding notable items 1,709 1,080 406 554 440 62
4,251
Mov't Mar 19 - Mar 18
BT Financial Westpac Westpac
Consumer Business Group Institutional New Zealand
2
Group
% Bank Bank (Australia) Bank (A$) Businesses
Group
Net interest income (5%) (5%) 1% 8% 7% (31%)
(4%)
Non-interest income (3%) (8%) (84%) (9%) 22% (33%)
(32%)
Net operating income (5%) (5%) (63%) (1%) 10% (31%)
(10%)
Operating expenses 3% 4% 48% (4%) 7% (11%)
7%
Core earnings
(10%) (10%) large 1% 12% (66%)
(23%)
Impairment (charges) / benefits 7% (49%) large large (63%) large
(25%)
Operating profit before income tax
(12%) (6%) large (2%) 16% (39%)
(23%)
Income tax expense (13%) (6%) large (1%) 9% (7%)
(23%)
Net profit
(11%) (6%) large (2%) 19% (89%)
(22%)
Non-controlling interests - - - - - (100%)
50%
Cash earnings
(11%) (6%) large (2%) 19% (89%)
(22%)
Add back notable items - - - - - -
-
Cash earnings excluding notable items
(11%) 6% (22%) (2%) 19% (89%)
(5%)
1
The Group has adopted AASB 9 Financial Instruments and AASB 15 Revenue from Contracts with Customers from 1 October 2018.
Statutory comparatives have not been restated. Refer to Note 1 in Section 4 for further detail. However, where applicable, cash
earnings comparatives (excluding expected credit loss provisioning) have been restated to aid comparability. Refer to the Cash
earnings policy in Section 1.3.4 for further detail. In addition, during First Half 2019, the Group has made a number of presentational
changes to the Balance Sheet and Income Statement. Both statutory and cash earnings comparatives have been restated. Refer to
Note 1 in Section 4 for further detail.
2
Refer to Section 3.5 for the Westpac New Zealand NZ$ divisional result.
2019 Interim financial results
Review of Group operations
14 | Westpac Group 2019 Interim Financial Results Announcement
Movement in cash earnings ($m)
First Half 2019 – First Half 2018
111
87
4,251
1H19 cash
earnings
Tax & non-
controlling
interests
1H18 cash
earnings
(76)
0
1H19 cash
earnings
ex notable
items
(753)
1H19
notable
items
Non-
interest
income
1H18 cash
earnings
ex notable
items
4,251
4,049
(116)
(208)
Add back
1H18
notable
items
Operating
expenses
Impairment
charges
Net interest
income
3,296
-955
Movement in core earnings by division ($m)
First Half 2019 – First Half 2018
19
8
77
Consumer
Bank
Westpac
New
Zealand
(A$)
Business
Bank
(136)
BTFGWIB1H19 core
earnings
5,062
Group
Businesses
1H19 core
earnings
ex notable
items
(257)
(1,086)
Add back
1H18
notable
items
0
1H18 core
earnings
6,548
6,148
1H18 core
earnings
ex notable
items
1H19
notable
items
6,548
(111)
-1,486
2019 Interim financial results
Review of Group operations
Westpac Group 2019 Interim Financial Results Announcement | 15
2.1 Performance overview
Overview
First Half 2019 has been another challenging period for financial services companies, including Westpac. In
particular, the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry
(Royal Commission), brought to light confronting stories and examples of poor behaviour affecting customers. This
in turn has eroded public sentiment and trust in the financial services industry. Across the industry, firms such as
Westpac are now working to respond to the findings of the Royal Commission's final report (released 1 February
2019), as well as to remediate customer issues. These efforts will strengthen the focus on leadership, governance
and culture, and create better outcomes for customers and shareholders. Westpac's response to the Royal
Commission is summarised later in this overview.
At the same time, the economic environment has softened over the last six months, with lower economic growth,
subdued inflation and lower business and consumer sentiment. For financial services, this has contributed to more
cautious demand for lending, a decline in deposit growth, and lower house prices. Although growth has slowed,
competition has remained intense across the sector including from domestic and international banks and from
non-bank operators.
With this backdrop, Westpac reported cash earnings of $3,296 million in First Half 2019, a reduction of
$518 million (or 14%) compared to Second Half 2018 and down $955 million (or 22%) from First Half 2018. The
Group's performance in First Half 2019 was impacted by two notable items: provisions for estimated customer
refunds and payments (and associated costs) of $617 million (after tax); and provisions for costs associated with
the reset of Westpac's wealth strategy announced on 19 March 2019 ($136 million after tax). In First Half 2019,
the majority of these items were recorded in BT Financial Group (BTFG) and the Business Bank. These notable
items are explained in more detail later in this overview. For more information see Section 1.3.2 and Note 14 of the
2019 Interim Financial Report.
Excluding movements in notable items, Westpac's cash earnings in First Half 2019 were $46 million lower, down
1% compared to Second Half 2018. Excluding notable items, the Business Bank, Westpac New Zealand, and
Westpac Institutional Bank all increased cash earnings over the half. These increases were more than offset by a
lower contribution from the Group's Treasury operations, and higher insurance claims (from severe weather
events) contributing to a lower BTFG result. Before notable items, the Consumer Bank result was relatively flat
(down, $7 million).
Westpac's reported net profit for First Half 2019 was $3,173 million; a $724 million (or 19%) decline on Second
Half 2018. In addition to the notable items mentioned above, reported net profit was also impacted by a fair value
charge on economic hedges of $125 million in First Half 2019, compared to a $163 million benefit in Second Half
2018 (a net $289 million turnaround).
The strength of the Group's balance sheet has been maintained. The Group's common equity tier 1 ratio was
10.6% at 31 March 2019 and above APRA's unquestionably strong benchmark. The liquidity coverage ratio (LCR)
was higher at 138% (133% at September 2018) while the net stable funding ratio was little changed at 113%
(114% at September 2018). Asset quality has also been little changed, with stressed exposures to total committed
exposures up 2 basis points over the last six months and up 1 basis point over the last year. Within this measure,
consumer delinquencies were higher, consistent with slower economic activity.
Dividends
While cash earnings were lower, the strength of the Group's capital ratio and lower growth environment has
enabled the Board to determine an interim ordinary dividend of 94 cents per share, fully franked, unchanged over
both Second Half 2018 and First Half 2018.
The interim ordinary dividend represents a cash earnings payout ratio of 98% and a dividend yield of 7.3%
1
. The
cash earnings payout ratio excluding notable items was 80%. The Board has determined to issue shares to satisfy
the dividend reinvestment plan (DRP) for the interim 2019 dividend and to apply a 1.5% discount to the market
price used to determine the number of shares issued under the DRP. The market price used to determine the
number of shares issued under the DRP will be set over the 10 trading days commencing 22 May 2019. The
discount to the DRP market price has been applied to give the Group additional capital flexibility, including for
regulatory changes to the measurement of capital and risk weighted assets likely to be announced in Second Half
2019. The interim ordinary dividend will be paid on 24 June 2019 with the record date of 17 May 2019
2
. After
allowing for the interim dividend, the Group's adjusted franking account balance was $1,234 million.
The Government's Bank Levy cost $193 million in First Half 2019, up from $192 million in Second Half 2018, and
$186 million in First Half 2018. Despite the decline in Westpac's cash earnings, the Levy increased as it is based
on applicable liabilities which were higher over the period. The $193 million Bank Levy is equivalent to 4 cents per
share and is included in net interest income where it reduced net interest margin by 5 basis points.
1
Based on the closing share price as at 29 March 2019 of $25.92.
2
Record date for 2019 interim dividend in New York is 16 May 2019.
2019 Interim financial results
Review of Group operations
16 | Westpac Group 2019 Interim Financial Results Announcement
2019 priorities
As part of its Full Year 2018 Results Announcement, Westpac reiterated that its service strategy remains
unchanged and is fundamental to its future. However, given the environment the Group highlighted its three
priorities for 2019 were to: 1. Deal with outstanding issues, 2. Build momentum in the customer franchise and 3.
Structural cost reduction. Discussion in this Performance Overview is structured in line with these priorities.
Dealing with outstanding issues
Over recent years, the Group has conducted extensive work across the organisation to review its products and
operations, assess culture, and enhance governance. This has included: ongoing product reviews; finalising a
detailed culture and governance assessment; resetting the Group's wealth operations, exiting Hastings funds
management and Ascalon and commencing the implementation of the recommendations from the Royal
Commission's Final Report. The Group is now accelerating the implementation of the changes needed to address
the issues identified, further strengthen culture and accountability, and accelerating customer remediation.
The Royal Commission represents an inflection point for the industry, and Westpac. The Royal Commission Final
Report’s recommendations raise important points of policy and principle for the industry and regulators. Westpac
is actively responding to the findings with a detailed response plan that has Board oversight.
Of the 51 recommendations relevant to Westpac, around 10 are largely implemented. This includes the removal of
grandfathered commission payments for its financial planners from 1 October 2018 and implementation of the
Sedgwick Review recommendations for the Group’s employees. For other recommendations requiring action,
preparatory work is underway or further guidance from government or regulators is required before substantive
work can commence.
For more details on the Royal Commission refer to Section 4.1, Directors’ Report (Significant developments).
Culture, Governance and Accountability self-assessment
Westpac's Culture, Governance and Accountability self-assessment (CGA) report was finalised in November 2018
and provided to APRA at that time. The report has assessed Westpac's risk culture, governance and
accountability frameworks and practices, and the impact they have on the management of non-financial risk. Work
has commenced to implement the 45 actions recommended in the report to enhance governance, accountability
and culture across Westpac and supplementary activities in these areas. The Board is also overseeing
implementation of the CGA action plan.
Get it right, put it right
Through the Group’s ‘get it right, put it right’ initiatives we have continued to review products, processes and
policies to identify where we may not have got it right for customers. Where problems were identified, the Group
has committed to fix them and refund customers. These initiatives identified a number of issues that have required
remediation.
The Group booked an after tax cost of $617 million of provisions for estimated customer refunds, payments and
associated costs. This half, the Group has taken steps designed to accelerate the processing of customer refunds
and centralise oversight of certain remediation under the Chief Operating Officer.
In First Half 2019 the major items included in the provisions were related to:
• Customer refunds of ongoing advice service fees associated with the Group's salaried financial planners.
These provisions add to those in prior periods and reflect an increase in the estimated proportion of instances
where records of financial advice are insufficient for the purposes of the remediation;
• Estimated customer refunds of ongoing advice service fees charged by the Group's authorised representatives
that provided financial planning services under the Magnitude and Securitor brands. The provisions have been
based on an estimate of the proportion of instances where records of financial advice are insufficient for the
purposes of the remediation. The provision is an estimate of fees and interest that may be refunded to
customers along with costs of implementing the remediation;
• Refunds for certain consumer and business customers that had interest only loans that did not automatically
switch, when required, to principal and interest loans; and
• Refunds to certain business customers who were provided with business loans where they should have been
provided with loans covered by the National Consumer Credit Protection Act.
2019 Interim financial results
Review of Group operations
Westpac Group 2019 Interim Financial Results Announcement | 17
Resetting Wealth
In 2018, Westpac indicated that, while it was committed to its Wealth and Insurance operations, it was considering
its ability to efficiently and effectively provide personal financial advice. In March 2019, the Group announced that
it would change the way it supports customers' wealth and insurance needs by exiting the provision of personal
financial advice and moving to a referral model for these services.
At the same time, the Group announced an organisational realignment of BTFG's businesses, with the Private
Wealth, Platforms & Investments, and Superannuation businesses moving into an expanded Business division,
with the Insurance business moving to the expanded Consumer division. As these changes were effective from
1 April 2019, the new organisational structure is not presented in the First Half 2019 financial results.
As a result of these changes, the Group raised a provision for exit and transition costs of $190 million ($136 million
after tax). As the Group's advice business was loss making, the exit is expected to be EPS accretive (excluding
remediation provisions) for Westpac in 2020. The exit of advice and resetting the Group's wealth operations is
expected to reduce costs by around $280 million per annum over 2019 and 2020.
Given these changes, from Full Year 2019, BTFG will no longer be reported as a standalone division.
Customer complaints
A fundamental lesson of the Royal Commission was that while Westpac had made material progress in reducing
complaints over recent years, it had not managed certain categories of complaints as effectively as it should have.
For example, some complaints took too long to resolve, and the Group did not do enough to identify and prioritise
vulnerable customers. In June 2018 Westpac established the Customer and Corporate Relations division to
embed a focus on customer complaints. The change centralised the management, reporting and resolution of
complaints. Although complaints are higher over the last 12 months because of the change in customer
expectations, an increase in our efforts around formal logging of complaints has reduced complaint handling times
by over 22% in First Half 2019.
Momentum in customer franchise
The Group has continued to build momentum in its customer franchise by growing the number of customers,
deepening relationships, digitising processes and making banking and financial services easier for customers.
Progress over the half has included:
• Increased the number of Australian banking customers by over 36,000 in the last six months (up 1.6%);
• Number 1 in NPS for Business Bank and number 2 for Consumer Bank;
• Piloting a new virtual chat assistant called 'Red' for Westpac customers. Available 24/7, Red has already
helped over 100,000 customers with their queries;
• Made the New Payments Platform available to Westpac consumer customers, enabling them to make real time
payments and to establish their own PayID;
• After five years of development, the Group's Customer Service Hub (CSH) is now live with the first mortgages
originated via the system. The CSH provides a simplified home ownership process for Westpac bankers and
customers and will gradually be rolled out to other brands and product sets;
• Continued to roll out the Group's "Life Moments" services program to help customers when they need it most.
In First Half 2019 Westpac customers could access new resources to help manage their finances after a break-
up or separation. This builds on enhanced support for people who have lost a loved one, are having a baby or
have been involved in a natural disaster; and
• Grew general insurance gross written premiums by 3% over the prior half with improved sales through digital
channels.
Structural cost reduction
In response to the challenges facing industry revenues, the Group announced a goal of achieving $400 million in
structural productivity savings in 2019. This would be a 32% uplift to the productivity savings achieved in 2018. In
First Half 2019 a range of productivity initiatives delivered $146 million in savings. As the benefits from these
initiatives flow through to Second Half 2019 and further plans are implemented, the Group believes it is well placed
to achieve the $400 million Full Year 2019 target.
The Group's Wealth reset has enabled Westpac to close its advice business, which was a high cost, loss making
business and restructure the Group's wealth operations to reduce the costs associated with running a separate
operating division. While the initial savings from this change are relatively small, additional opportunities are
expected to emerge in Full Year 2020 as the new operating model is bedded down.
2019 Interim financial results
Review of Group operations
18 | Westpac Group 2019 Interim Financial Results Announcement
Other efficiency initiatives completed over the half included:
• Reduced FTE by 788 (or 2%). Around 1,000 roles were reduced through the half from completion of various
organisational reviews of head office and support roles. These declines were partially offset by around 200 new
FTE to support regulatory and compliance programs;
• Consolidated property, including the exit of two operations centres in Sydney (Epping and Norwest), the net
reduction of 38 branches, and the removal of almost 350 ATMs (12% of the fleet);
• Continued to rationalise physical currency in the network, removing over $700 million in cash from branches. In
addition to savings from holding less cash, there are flow-on benefits to courier costs, security, and branch
processing times; and
• An additional $23 million in savings from further modernisation of technology including a 20% rise in cloud
volumes and the removal of 13 applications.
Financial Performance Summary First Half 2019 – Second Half 2018
1
Westpac's cash earnings of $3,296 million in First Half 2019 was $518 million (or 14%) lower than Second Half
2018, and $955 million (or 22%) lower than First Half 2018.
The reduction in cash earnings, combined with a 0.4% increase in the weighted average shares on issue, led to a
14% decline in cash earnings per share (EPS) to 95.8 cents in First Half 2019. Average ordinary equity increased
1% which in turn contributed to the Group's return on equity (ROE) falling to 10.43%, down 165 basis points.
These results were impacted by notable items detailed below:
Notable items
To help explain Westpac's performance, two major items in this result are described as "notable items":
• Provisions for estimated customer refunds and payments, along with associated costs. These provisions were
incurred in First Half 2019 and in Second Half 2018; and
• Exit and restructuring costs associated with the reset of Westpac's wealth strategy. These provisions were
incurred in First Half 2019.
No notable items were recorded in First Half 2018.
Throughout this Results Announcement, the term "notable items" refer to these items only. These items are
discussed further in Section 1.3.2 and Note 14 of the 2019 Interim Financial Report.
Notable items impact cash earnings, the major income statement line items and certain performance metrics. The
following tables present the quantum of these items and their impact on movements in the income statement
(Table 1) and certain performance metrics (Table 2) over First Half 2019, Second Half 2018 and First Half 2018.
Table 1. Cash earnings impact from notable items and impact on movements in key line items
Size of notable items ($m)
Growth
1H19 – 2H18 (%)
Growth
1H19 – 1H18 (%)
1H19 2H18 As reported
Ex notable
items As reported
Ex notable
items
Net interest income (212) (105) (1) - (4) (1)
Non-interest income (600) (163) (30) (12) (32) (8)
Operating expenses (274) (112) 1 (3) 7 2
Core earnings (1,086) (380) (14) (2) (23) (6)
Impairment charges - - (10) (10) (25) (25)
Tax 333 99 (18) (4) (23) (5)
Cash earnings (753) (281) (14) (1) (22) (5)
Table 2. Certain cash earnings performance metrics including and excluding notable items
1H19 2H18 1H18
(%)
Cash
earnings
Cash
earnings ex
notable items
Cash
earnings
Cash
earnings ex
notable items
Cash
earnings
Cash
earnings ex
notable items
Return on equity 10.43 12.82 12.08 12.97 13.96 13.96
Net interest margin 2.12 2.17 2.16 2.18 2.28 2.28
Expense to income ratio 49.90 43.67 45.83 43.73 41.74 41.74
1
Unless otherwise stated.
2019 Interim financial results
Review of Group operations
Westpac Group 2019 Interim Financial Results Announcement | 19
Financial Performance Summary First Half 2019 – Second Half 2018
1
(continued)
First Half 2019 cash earnings, excluding notable items were $46 million lower than Second Half 2018 (down 1%)
and were $202 million lower (down 5%) than First Half 2018.
Excluding notable items the ROE was 12.82%. Net tangible assets per share, which was impacted by the adoption
of AASB 9, decreased 2% to $15.12.
While the economic environment generally remains positive, with GDP growth of 2.3% for the year to December
2018, unemployment remaining at historical lows and inflation holding below 2%, economic activity has slowed
over the last six months. Modest wages growth, a peaking construction cycle, falling house prices and weaker
business and consumer sentiment have all contributed to weaker activity. For financial services this has
contributed to lower credit and deposit growth and lower demand for wealth and insurance services. At the same
time, increased data and verification requirements have made the process of borrowing more difficult for
customers, particularly for smaller businesses.
These conditions contributed to a slowing in system credit growth in Australia to around 4% from almost 5% a year
earlier with both housing and business lending growth moderating. In New Zealand, private sector credit has been
a little stronger, growing at around 6% up from approximately 5% a year earlier.
For Westpac, total lending grew at 1% over the six months to March 2019 and by 2% over the prior 12 months.
Most of the growth over the half was in New Zealand, supported by a stronger NZ exchange rate and 2% growth in
total loans. Growth in Australia was more modest with a 1% increase in mortgages, mostly in owner occupied
lending, partly offset by a decline in both business lending and in other personal lending.
Customer deposits decreased 1% over the half, mostly from lower government deposits and from lower flows
following the repricing of both term deposits and online savings products. New Zealand deposits were up 4% (9%
in A$ terms), with good growth across all categories.
Given the lower deposit balances, the deposit to loan ratio was down over the half to 71.6% at 31 March 2019.
Net interest margin of 2.12% was down 4 basis points over the half. The decline in margins was due to a lower
Treasury and Markets contribution (2 basis point impact), while notable items had a 3 basis point impact over the
half. Excluding these items, the margin before Treasury and Markets was 1 basis point higher over the half.
This 1 basis point rise was due to higher loan and deposit spreads (adding 1 basis point each) partially offset by
higher securities holdings, both for market inventory and liquidity. Most of the increase in loan spreads was due to
the mortgage repricing that occurred in September 2018, although this was largely offset by competition for new
lending, retention pricing and the impact of customers switching to lower rate principal and interest lending from
interest only facilities. Improved deposit spreads (up 1 basis point) followed the repricing of term deposits and
online deposits.
Non-interest income declined $742 million in First Half 2019 to $1,714 million (down 30%). Most of the decline was
due to an increase in notable items of $437 million, and the non-repeat of Hastings income ($180 million).
Westpac finalised the exit of its infrastructure funds business 'Hastings' in Second Half 2018. The exit had a small
impact on cash earnings but had a more significant impact on non-interest income (including from large exit
related fees) and costs (from the write-down of goodwill).
Excluding these items (notable items and Hastings) non-interest income was down $125 million or 5%, with the
decline mostly due to lower wealth and insurance income including from higher general insurance claims
($94 million) for major weather events (Queensland Floods and NSW hailstorms), and lower fees following
decisions to reduce platform fees and eliminate grandfathered commission payments. Partly offsetting these was
higher trading income of $45 million along with the gain from the sale of the Group's holding in Paymark in New
Zealand.
In aggregate, the 1% decline in net interest income and the 30% decline in non-interest income led to total
operating income declining 8%. Excluding notable items, operating income was 2% lower over the Second Half
2018.
Expenses increased 1% or $34 million in First Half 2019 compared to Second Half 2018. Expense growth this
period was also impacted by notable items which added $162 million to costs. Expenses excluding notable items
were down 3%. This decline was mostly due to the non-repeat of $121 million of Hastings costs in Second Half
2018.
Within business as usual costs, salary costs were higher following annual salary increases from January 2019,
along with mix impacts from employing more highly qualified individuals. Occupancy costs were higher from
annual rent increases and cost of branch closures. Technology costs were also higher mostly associated with
investment in the Group's infrastructure, including enhancements to cybersecurity, Panorama and launching the
CSH. These increases were broadly offset by structural productivity savings of $146 million mentioned earlier.
1
Unless otherwise stated.
2019 Interim financial results
Review of Group operations
20 | Westpac Group 2019 Interim Financial Results Announcement
Financial Performance Summary First Half 2019 – Second Half 2018
1
(continued)
Given the notable items (higher expenses and reduced revenues) the expense to income ratio increased over
4 percentage points to 49.9% for First Half 2019. Excluding notable items, the cost to income ratio was 43.7%,
little changed over the last six months and around 2 percentage points higher compared to First Half 2018.
Credit quality remained sound, with key metrics relatively stable over the half and over the prior corresponding
period. Stressed exposures to total committed exposures were little changed at 1.10% at March 2019, up 2 basis
points from September 2018 and up 1 basis point from March 2018.
Within stressed exposures, impaired exposures were higher including from one facility over $50 million migrating
to impaired in the second quarter. Mortgage delinquencies were also higher (up 8 basis points over the last six
months) which contributed to a rise in 90 days past due and not impaired category within stressed exposures. The
proportion of watchlist and substandard exposures declined over the period due in part to the migration of one
larger facility to impaired.
Slowing economic activity and low wages growth has contributed to a rise in customers experiencing difficulty. At
the same time, current conditions have led to an increase in the time taken (on average) to sell a property.
Together, these factors have contributed to the rise in mortgage delinquencies over the half. Net mortgage write-
offs for the half remained low at $52 million (2 basis points), compared to $42 million in Second Half 2018 and
$47 million in First Half 2018.
Consistent with these trends, properties in possession remained low at 482, but were up from 396 at September
2018.
Given the credit quality picture, impairment charges were $333 million for First Half 2019, down 10% (or
$35 million) on Second Half 2018 and representing 9 basis points to average gross loans. The decline was due to
lower new individually assessed provisions partially offset by lower write-backs. New collectively assessed
provisions were also lower as watchlist and substandard facilities declined and write-offs were lower.
Following the adoption of AASB 9, overall provisioning levels have increased, mostly associated with facilities that
are still performing but have experienced a significant increase in credit risk (called Stage 2 facilities). As a result,
total provisions were $3,995 million at March 2019, up from $3,053 million at September 2018.
The ratio of impaired exposure provisions to total impaired exposures was 46% at March 2019, which was
unchanged compared to First Half 2018. Consistent with the rise in overall provisions the ratio of collectively
assessed provisions to credit risk weighted assets has increased to 98 basis points, up from 73 basis points at
September 2018.
The effective tax rate was 30.2% for the half. This is above the corporate tax rate due to the non-deductibility of
certain expenses, including hybrid distributions.
Across divisions earnings results were mixed compared to Second Half 2018 with BTFG and the Business Bank
particularly affected by notable items. The Consumer Bank recorded a 7% rise in cash earnings, with higher
margins and lower expenses. New Zealand (in NZ$) recorded a 4% increase in cash earnings, with core earnings
up 6%, and WIB recorded a 1% increase in cash earnings from higher trading income and improved efficiency.
The Business Bank's cash earnings were down $67 million (6%) due to an increase in notable items while
BT Financial Group reported a loss of $305 million with the decline due to notable items.
Balance sheet
The Group maintained the strength of its balance sheet across all dimensions:
• A CET1 capital ratio of 10.6%, above the "unquestionably strong" benchmark set by APRA. The ratio was little
changed over the half as earnings, after dividends, more than offset other capital movements. Risk weighted
assets were lower over the half;
• A liquidity coverage ratio (LCR) of 138%, up from 133% six months earlier and comfortably above the 100%
regulatory minimum; and
• A net stable funding ratio (NSFR) of 113%, little changed over the half and prior year and also well above the
100% regulatory minimum.
1
Unless otherwise stated.
2019 Interim financial results
Review of Group operations
Westpac Group 2019 Interim Financial Results Announcement | 21
Financial performance summary First Half 2019 - First Half 2018
Cash earnings of $3,296 million were down 22% with core earnings also down 23%, while impairment charges fell
25%.
Net interest income fell 4% with a 16 basis point decrease in margins only partially offset by a 4% rise in average
interest-earning assets. Margins excluding Treasury and Markets decreased 12 basis points from First Half 2018,
with the decline due to notable items (5 basis points), higher short term wholesale funding costs (5 basis points)
and lower mortgage spreads. The decline in mortgage spreads was due to customers switching from interest only
to principal and interest lending, changes in portfolio mix towards lower margin products (fixed rate and basic
products), competition contributing to lower rates on new mortgages and more retention pricing. These declines
were partially offset by higher deposit spreads.
Total loans grew 2%, with most of the rise due to an increase in Australian mortgage lending and New Zealand
lending. Australian business lending was little changed compared to First Half 2018 with subdued demand and
lower utilisation of warehouse facilities. New Zealand lending was up 4% (up 6% in A$ terms) from growth in
mortgages and business lending. Australian personal lending was lower, mostly reflecting lower demand and a
decline in low return products, particularly Auto lending. Customer deposits grew 2% over First Half 2018.
Non-interest income was down 32%, impacted by an increase in notable items of $600 million, and the loss of
income following the exit of the Hastings business in 2018 ($23 million). Excluding these, non-interest income was
down 7% mostly from lower financial markets income and a reduction in wealth management income (from a lower
advice contribution, the reduction in pricing across platforms and a reduction in average funds). Insurance claims
for major weather events were also higher, up $66 million.
Expenses increased 7%. This included an increase of $274 million in notable items. Excluding notable items,
expenses were $76 million higher. Most of this expense growth was due to higher spending associated with
investment and an increase in regulatory and compliance costs with $319 million of structural productivity savings
more than offsetting ordinary cost growth.
Impairment charges were $111 million (or 25%) lower than First Half 2018, with most of the decrease due to lower
new collectively assessed provisions from lower watchlist and substandard facilities. Individually assessed
provisions were $24 million higher mostly from lower recoveries.
Divisional performance summary
The performance of each division based on performance in First Half 2019 compared to Second Half 2018 is
discussed below.
Consumer Bank
Consumer Bank's (CB) cash earnings of $1,514 million were $101 million higher than Second Half 2018,
(excluding notable items, cash earnings were little changed, down $7 million). Operating income growth of 2%
combined with a 3% decline in expenses led to 7% growth in core earnings. Cash earnings growth was also 7%
after higher impairment charges and tax. Within operating income, net interest income was up 3% from a small
rise in volumes (1% rise in mortgages) and a 6 basis point increase in net interest margin. Margins were higher
from less notable items and higher deposit spreads. Non-interest income was $33 million lower (down 8%), due to
a decline in currency conversion fees and lower product fees consistent with weaker new volumes in mortgages,
personal loans and cards. Expenses were down $62 million (or 3%), mostly due to the reversal of a notable item
raised in Second Half 2018 as the settlement was not approved by the Court. Structural productivity gains, from
reducing the size of the network and more customers migrating to digital, were largely offset by business as usual
expenses and costs linked to improving productivity including property make good costs and redundancies. The
$32 million increase in impairment charges was mostly due to higher consumer delinquencies.
Business Bank
Business Bank (BB) delivered cash earnings of $1,013 million, a 6% decrease, (excluding notable items, cash
earnings were up 5%). Lending decreased 1%, with the decline due to subdued demand across industries and
from the division's continued focus on risk adjusted return. Deposits declined 1% over the half. The net interest
margin was down 15 basis points but before notable items was up 7 basis points driven by mortgages, business
loans and deposit pricing benefits in First Half 2019. Non-interest income was down 9%. Half of the
$28 million decline in non-interest income was due to notable items with the other half due to lower lending fees
consistent with the decline in lending and from lower merchant income. Expenses were 2% higher, mostly from
regulatory and compliance costs, and notable items. Business as usual costs were largely offset by productivity
initiatives including increased use of digital tools to support bankers, and from a simplified operating model. Credit
quality has been sound, with lower stress in the commercial portfolio emerging over the half. This in turn
contributed to an $89 million reduction in impairment charges.
2019 Interim financial results
Review of Group operations
22 | Westpac Group 2019 Interim Financial Results Announcement
BT Financial Group
BT Financial Group (BTFG) reported a cash earnings loss of $305 million, as its performance was impacted by
notable items of $620 million after tax. This compares to cash earnings of $241 million in Second Half 2018.
Excluding these notable items, BTFG's cash earnings were $315 million in First Half 2019, compared to Second
Half 2018 cash earnings (excluding notable items) of $382 million, down 18%. The decline was due to higher
general insurance claims for major weather events ($66 million after tax), lower margins from the decision to
reprice certain platform fees, and from the discontinuing of grandfathered commission payments. Expenses were
up 28% but were 7% lower after notable items. Productivity benefits, including from product simplification and
organisational redesign, more than offset ordinary expense growth.
Westpac Institutional Bank
Westpac Institutional Bank (WIB) recorded a 1% increase in cash earnings to $543 million. Movements in revenue
and expenses this half were significantly affected by the exit of Hastings in Second Half 2018. Hastings
contributed $19 million to cash earnings in Second Half 2018 by adding $180 million to non-interest income,
$121 million to expenses and $41 million to tax expenses. Excluding the impact of Hastings, cash earnings was up
5%. Net interest income was $11 million lower with little change in lending and lower margins. Non-interest income
was 16% lower, but was up 8% up excluding Hastings, with higher financial markets income across foreign
exchange, fixed income and commodities.
Expenses were down 15% but excluding Hastings were little changed (up $4 million). Impairment charges were
$24 million higher over the half with $15 million charge in First Half 2019 compared to a $9 million benefit in
Second Half 2018.
Westpac New Zealand
Westpac New Zealand (WNZL) delivered cash earnings of NZ$555 million, up 4% over the half. Excluding notable
items (incurred in Second Half 2018), cash earnings increased 1%. The business generated 6% core earnings
growth, although this was partly offset by a $27 million increase in impairment charges (an impairment charge of
NZ$14 million, versus a NZ$13 million impairment benefit in Second Half 2018). Lending increased 2% over the
half while deposits grew 4%, fully funding loan growth. Balance sheet growth was partially offset by a 2 basis point
decline in margins leading to net interest income growing 1%. Non-interest income was up NZ$52 million with
most of the rise due to a NZ$40 million gain on the sale of an associate. Expenses were 3% higher, mostly from
higher investment spending including an increase in software amortisation as new systems came on line.
Group Businesses
Group Businesses delivered cash earnings of $7 million in First Half 2019, down $41 million on the prior half. The
decrease was mostly due to a lower Treasury contribution (from interest rate risk management). This decline was
partially offset by lower expenses and an increased impairment benefit. The impairment benefit was $23 million
higher mostly due to movements in centrally held impairment overlays.
2019 Interim financial results
Review of Group operations
Westpac Group 2019 Interim Financial Results Announcement | 23
2.2 Review of earnings
2.2.1 Net interest income
1,2
% Mov't % Mov't
Half Year Half Year Half Year Mar 19 - Mar 19 -
$m March 19 Sept 18 March 18 Sept 18 Mar 18
Net interest income
Net interest income excluding Treasury & Markets 8,081 8,082 8,258 - (2)
Treasury net interest income
3
240 322 396 (25) (39)
Markets net interest income 68 66 63 3 8
Net interest income 8,389 8,470 8,717 (1) (4)
Add back notable items 212 105 - 102 -
Net interest income excluding notable itmes 8,601 8,575 8,717 - (1)
Average interest-earning assets
Loans 674,896 665,227 651,943 1 4
Third party liquid assets
4
97,222 97,909 93,357 (1) 4
Other interest-earning assets 22,542 19,698 21,711 14 4
Average interest-earning assets 794,660 782,834 767,011 2 4
Net interest margin
Group net interest margin 2.12% 2.16% 2.28% (4bps) (16bps)
Group net interest margin excluding Treasury & Markets
5
2.04% 2.06% 2.16% (2bps) (12bps)
Excluding notable items
Group net interest margin 2.17% 2.18% 2.28% (1bps) (11bps)
Group net interest margin excluding Treasury & Markets
5
2.09% 2.08% 2.16% 1bps (7bps)
First Half 2019 – Second Half 2018
Net interest income decreased $81 million or 1% compared to Second Half 2018. Key features include:
• A 2% increase in average interest-earning assets largely from Australian housing and New Zealand lending;
• Group net interest margin excluding Treasury and Markets decreased 2 basis points, primarily due to a net
3 basis point impact from provisions for estimated customer refunds and payments. Other items netted to a
1 basis point benefit, including the full period impact from changes to pricing of Australian variable mortgages
being partly offset by reduced mortgages spreads from competition, retention repricing and changes in the mix
of the mortgage portfolio with customers switching from interest only to principal and interest; and
• Treasury and Markets net interest income decreased $80 million or 21%, with lower Treasury revenue from
interest rate risk management.
First Half 2019 – First Half 2018
Net interest income decreased $328 million or 4% compared to First Half 2018. Key features include:
• 4% growth in average interest-earning assets, primarily from Australian and New Zealand housing;
• Group net interest margin excluding Treasury and Markets decreased 12 basis points primarily due to a 5 basis
point impact from provisions for estimated customer refunds and payments, increased short term wholesale
funding costs (5 basis points), and reduced mortgage spreads. This was partly offset by the full period impact
from changes to pricing of Australian variable mortgages and increased spreads across customer deposits.
• In aggregate, the contribution from Treasury and Markets was down $151 million or 33%, primarily from lower
Treasury interest rate risk management revenue.
1
Refer to Section 4, Note 3 for reported results breakdown. Refer to Section 5, Note 3 for cash earnings results breakdown. As
discussed in Section 1.3, commentary is reflected on a cash earnings basis.
2
The Group has adopted AASB 9 Financial Instruments and AASB 15 Revenue from Contracts with Customers from 1 October 2018.
Statutory comparatives have not been restated. Refer to Note 1 in Section 4 for further detail. However, where applicable, cash
earnings comparatives (excluding expected credit loss provisioning) have been restated to aid comparability. Refer to the cash
earnings policy in Section 1.3.4 for further detail. In addition, during First Half 2019, the Group has made a number of presentational
changes to the Balance Sheet and Income Statement. Both statutory and cash earnings comparatives have been restated. Refer to
Note 1 in Section 4 for further detail.
3
Treasury net interest income excludes capital benefit.
4
Refer Glossary for definition.
5
Calculated by dividing net interest income excluding Treasury and Markets, by total average interest earning assets.
2019 Interim financial results
Review of Group operations
24 | Westpac Group 2019 Interim Financial Results Announcement
2.2.2 Loans
1, 2
As at
As at
As at
% Mov't % Mov't
31 March 30 Sept 31 March Mar 19 - Mar 19 -
$m 2019 2018 2018 Sept 18 Mar 18
Australia 618,811 619,630 610,397
- 1
Housing 447,164 444,741 437,239 1 2
Personal 22,463 22,997 23,752 (2) (5)
Business 152,424 154,347 151,904 (1) -
Provisions (3,240) (2,455) (2,498) 32 30
New Zealand (A$) 79,000 74,045 74,687
7 6
New Zealand (NZ$) 82,470 80,860 79,557 2 4
Housing 49,584 48,893 47,907 1 4
Personal 1,937 2,040 2,128 (5) (9)
Business 31,308 30,251 29,898 3 5
Provisions (359) (324) (376) 11 (5)
Other overseas (A$) 16,486 16,015 16,309
3 1
Total loans 714,297 709,690 701,393
1 2
First Half 2019 – Second Half 2018
Total loans increased $4.6 billion or 1% compared to Second Half 2018. Excluding foreign currency translation
impacts, total loans increased $0.8 billion.
Key features of total loan growth were:
• Australian housing loans increased $2.4 billion or 1%. A slowdown in system
3
growth and the Group’s
decision to prioritise return over growth saw new lending down 18% in the half. Owner occupied housing
balances grew 2% and comprised 57% of the portfolio (30 September 2018: 57%, 31 March 2018: 56%), with
the investor property lending portfolio little changed in the half;
• Australian business loans decreased $1.9 billion or 1%, primarily from a 2% reduction in institutional balances,
from reduced utilisation of existing warehouse facilities and a 1% decrease in Business Bank reflecting lower
property lending balances and a decline in demand across industries;
• Australian provision balances increased $0.8 billion or 32% during the half following the implementation of
AASB 9; and
• New Zealand loans increased NZ$1.6 billion or 2%, due to broad based business lending growth (up 3%) and
housing growth of 1% mostly in fixed rate products to owner occupiers.
First Half 2019 – First Half 2018
Total loans increased $12.9 billion or 2% compared to First Half 2018. Excluding foreign currency translation
impacts, total loans increased $11.4 billion or 2%.
Key features of total loan growth were:
• Australian housing loans increased $9.9 billion or 2%. Owner occupier loans increased 5%, while investor
property lending was little changed. The Group managed interest only loan growth in a disciplined way, with
new interest only facilities representing 19% of new mortgage lending for the half and now comprise 31% of
the portfolio (30 September 2018: 35%, 31 March 2018: 40%). Customers have switched $16.0 billion of
interest only loans to principal and interest during this period, with principal and interest loans now comprising
65% of the portfolio;
• Australian personal loans decreased $1.3 billion or 5%, from lower auto finance and personal loans; and
• New Zealand lending increased NZ$2.9 billion or 4%. Housing grew 4% mostly in fixed rate products and
business lending increased 5%, supported by growth in agriculture and corporate lending. This was partly
offset by a 9% decline in personal loans, from lower credit card and personal lending balances.
1
Spot loan balances.
2
The Group has adopted AASB 9 Financial Instruments and AASB 15 Revenue from Contracts with Customers from 1 October 2018.
Statutory comparatives have not been restated. Refer to Note 1 in Section 4 for further detail. However, where applicable, cash
earnings comparatives (excluding expected credit loss provisioning) have been restated to aid comparability. Refer to the cash
earnings policy in Section 1.3.4 for further detail. In addition, during First Half 2019, the Group has made a number of presentational
changes to the Balance Sheet and Income Statement. Both statutory and cash earnings comparatives have been restated. Refer to
Note 1 in Section 4 for further detail.
3
Source: RBA March 2019.
2019 Interim financial results
Review of Group operations
Westpac Group 2019 Interim Financial Results Announcement | 25
2.2.3 Deposits and other borrowings
1
As at
As at
As at
% Mov't % Mov't
31 March 30 Sept 31 March Mar 19 - Mar 19 -
$m 2019 2018 2018 Sept 18 Mar 18
Customer deposits
Australia 433,736 446,667 429,852
(3) 1
At call 222,733 233,052 227,021 (4) (2)
Term 168,313 171,832 161,864 (2) 4
Non-interest bearing 42,690 41,783 40,967 2 4
New Zealand (A$) 61,516 56,671 57,856
9 6
New Zealand (NZ$) 64,218 61,887 61,628 4 4
At call 24,520 23,339 24,164 5 1
Term 33,320 32,645 31,595 2 5
Non-interest bearing 6,378 5,903 5,869 8 9
Other overseas (A$) 16,391 14,413 14,355
14 14
Total customer deposits 511,643 517,751 502,063
(1) 2
Certificates of deposit 43,364 41,534 45,673
4 (5)
Australia 31,123 28,746 30,387 8 2
New Zealand (A$) 858 1,116 521 (23) 65
Other overseas (A$) 11,383 11,672 14,765 (2) (23)
Total deposits and other borrowings 555,007 559,285 547,736
(1) 1
First Half 2019 – Second Half 2018
Total customer deposits decreased $6.1 billion or 1% compared to Second Half 2018. Excluding foreign currency
translation impacts, customer deposits decreased $9.1 billion or 2%.
Key features of total customer deposits movements were:
• Australian customer deposits decreased $12.9 billion or 3%, primarily from lower institutional deposits across
both at-call and term deposits (largely Government balances). Non-interest bearing deposits were up 2% as
customers continued to direct funds to mortgage offset accounts;
• New Zealand customer deposits increased NZ$2.3 billion or 4%, with the increase more than fully funding
loan growth in the half. At call deposits increased 5% mostly across consumer and institutional segments; and
• Other overseas deposits increased $2.0 billion or 14% due to growth in term deposits in Asia.
Certificates of deposit increased $1.8 billion or 4%, from higher short term wholesale funding issuance in this form.
First Half 2019 – First Half 2018
Total customer deposits increased $9.6 billion or 2% compared to First Half 2018. Excluding foreign currency
translation impacts, customer deposits increased $7.4 billion or 1%.
Key features of total customer deposits growth were:
• Australian customer deposits increased $3.9 billion or 1%, mostly in term deposits (up 4%). Institutional
deposits were down over the year (largely Government balances);
• New Zealand customer deposits increased NZ$2.6 billion or 4%. Term deposits were up 5% as the business
focused on higher quality deposits and customer preference for higher rate products. Non-interest bearing
deposits increased 9%, from growth in business and consumer transaction deposits.
Certificates of deposit decreased $2.3 billion or 5%, from reduced short term wholesale funding issuance in this
form.
1
Spot deposit balances.
2019 Interim financial results
Review of Group operations
26 | Westpac Group 2019 Interim Financial Results Announcement
2.2.4 Net interest margin
First Half 2019 – Second Half 2018
Group net interest margin of 2.12% decreased 4 basis points from Second Half 2018. Notable items which reflect
additional provisions for estimated customer refunds and payments (mostly in Consumer and Business Bank),
reduced margin by a net 3 basis points in the half.
• Group net interest margin excluding Treasury, Markets and notable items was up 1 basis point to 2.09% with
key features including:
- 1 basis point increase from loan spreads primarily from pricing changes to certain Australian mortgage
types. This was partly offset by competition, retention repricing and changes in the mix of the mortgage
portfolio with customers switching from higher rate interest only lending to principal and interest facilities,
and the impact from changes to the calculation of credit card interest rates; and
- 1 basis point increase from customer deposit spreads, mostly from repricing of online and savings
accounts; partly offset by
- 1 basis point decrease from capital & other, including the impact of increased inventory of trading securities;
and
- Short term wholesale funding costs, including the impact of bank bill swap rate (BBSW), was little changed
over the half, despite volatility across quarters.
• The contribution from Treasury and Markets reduced by 2 basis points due to lower Treasury revenue from
interest rate risk management.
Term
wholesale
funding
2.09%
Liquidity
(2bps)
(1bps)
1bps
(5bps)
1H19
notable
items
Loans
2.04%
1bps
Short term
wholesale
funding
0bps
0bps
2H18 ex
notable
items
2.08%
2.16%
2.18%
2.17%
2.12%
Add back
2H18
notable
items
2bps
2H18
Group
NIM
2.06%
1H19 ex
notable
items
1H19
Group
NIM
Treasury
& Markets
Customer
deposits
Capital
& other
0bps
Group margin down 4bps
Group net interest margin movement (%)
First Half 2019 – Second Half 2018
Excluding Treasury and Markets up 1bps
2019 Interim financial results
Review of Group operations
Westpac Group 2019 Interim Financial Results Announcement | 27
First Half 2019 – First Half 2018
Group net interest margin was 2.12%, a decrease of 16 basis points from First Half 2018. Notable items which
reflect additional provisions for estimated customer refunds and payments (mostly in Consumer and Business
Bank) reduced margin by 5 basis points.
• Group net interest margin excluding Treasury, Markets and notable items was down 7 basis points to 2.09%
with key features including:
- 5 basis points decrease from higher short term wholesale funding costs related to movements in BBSW,
particularly in Second Half 2018;
- 3 basis points decrease to loan spreads from competition, changes in the mix of the mortgage portfolio with
customers switching from interest only loans to principal and interest facilities and the impact from changes
to the calculation of credit card interest rates, partly offset by pricing changes to certain Australian mortgage
types; and
- 1 basis point decrease from liquidity primarily due to increased holdings of third party liquid assets; partly
offset by
- 2 basis points increase from customer deposit spreads, across most categories.
• Lower revenue from interest rate risk management in Treasury reduced the Group net interest margin by
4 basis points.
1H19
Group
NIM
Liquidity
0bps
2.04%
(1bps)
2.12%
2bps
Term
wholesale
funding
Treasury
& Markets
2.09%
1H19 ex
notable
items
1H19
notable
items
Customer
deposits
LoansShort term
wholesale
funding
2.28%
1H18
Group
NIM
(5bps)
2.17%
Capital
& other
2.16%
(3bps)
(5bps)
0bps
(4bps)
Group margin down 16bps
Group net interest margin movement (%)
First Half 2019 – First Half 2018
Excluding Treasury and Markets down 7bps
2019 Interim financial results
Review of Group operations
28 | Westpac Group 2019 Interim Financial Results Announcement
2.2.5 Non-interest income
1,2
% Mov't % Mov't
Half Year Half Year Half Year Mar 19 - Mar 19 -
$m March 19 Sept 18 March 18 Sept 18 Mar 18
Net fee income 826 893 1,017 (8) (19)
Net wealth management and insurance income 323 1,088 929 (70) (65)
Trading income 464 419 507 11 (8)
Other income 101 56 69 80 46
Non-interest income 1,714 2,456 2,522
(30) (32)
Add back notable items 600 163 - large -
Non-interest income excluding notable items 2,314 2,619 2,522
(12) (8)
First Half 2019 – Second Half 2018
Non-interest income decreased $742 million or 30% compared to Second Half 2018, including a $437 million
impact from additional provisions for estimated customer refunds and payments (notable items). Excluding the
notable items, non-interest income was down $305 million or 12% mostly due to the exit of Hastings ($180 million),
lower insurance income (down $94 million) following a large rise in general insurance claims associated with major
weather events, the decision to reduce platform fees ($8 million) and cessation of grandfathered commission
payments ($21 million).
Net fee income
Net fee income decreased $67 million or 8%, largely impacted by:
• A decrease in credit card income (down $19 million) from lower currency conversion fees and a reduction in
annual fees;
• Lower advice revenue, from a reduction in planner numbers and lower activity ($20 million);
• $9 million impact from notable items mostly related to financial planning; and
• Lower revenue from payments and transaction fees ($21 million) driven by increased merchant costs and lower
account fees in New Zealand following the decision to eliminate certain consumer fees.
Net wealth management and insurance income
Net wealth management and insurance income decreased $765 million or 70% compared to Second Half 2018.
This included a rise in provisions for estimated customer refunds and payments (notable items), mostly related to
financial planning, of $428 million. Excluding notable items, net wealth management and insurance income
reduced $337 million or 31% due to:
• The exit of the Hastings business in Second Half 2018 saw revenue reduce $180 million to nil;
• Insurance income was down $94 million from:
- Lower general insurance income (down $96 million) from higher claims, including the impact from NSW
hailstorms and Queensland floods, partly offset by a 3% increase in net earned premiums; and
- Lender Mortgage insurance (LMI) contribution was down $4 million from reduced premium income and higher
claims; partly offset by
- Life insurance income up $6 million from lower claims and improved lapses, partly offset by lower net earned
premiums.
• Lower Platforms and Superannuation income (down $31 million) due to lower platform margins from repricing
and product mix changes and a 4% reduction in average group funds (excluding WIB) from lower asset
markets and outflows from legacy platforms. These declines were partly offset by a 38% increase in
BT Panorama funds to $17 billion; and
• Cessation of grandfathered commission payments ($21 million).
1
Refer to Section 4, Note 4 for reported results breakdown. Refer to Section 5, Note 4 for cash earnings results breakdown. As
discussed in Section 1.3, commentary is on a cash earnings basis.
2
The Group has adopted AASB 9 Financial Instruments and AASB 15 Revenue from Contracts with Customers from 1 October 2018.
Statutory comparatives have not been restated. Refer to Note 1 in Section 4 for further detail. However, where applicable, cash
earnings comparatives (excluding expected credit loss provisioning) have been restated to aid comparability. Refer to the cash
earnings policy in Section 1.3.4 for further detail. In addition, during First Half 2019, the Group has made a number of presentational
changes to the Balance Sheet and Income Statement. Both statutory and cash earnings comparatives have been restated. Refer to
Note 1 in Section 4 for further detail.
2019 Interim financial results
Review of Group operations
Westpac Group 2019 Interim Financial Results Announcement | 29
Trading income
Trading income increased $45 million or 11% compared to Second Half 2018, primarily driven by higher non-
customer income across fixed income, foreign currency and commodities. Refer to Section 2.2.7 for further detail
on Markets related income.
Other income
Other income increased $45 million or 80% compared to Second Half 2018, mostly reflecting the gain from asset
sales and the revaluation of a fintech investment, partly offset by the impact of hedging New Zealand earnings.
First Half 2019 – First Half 2018
Non-interest income decreased $808 million or 32% compared to First Half 2018. An increase in provisions for
estimated customer refunds and payments (notable items) was a large component of the decline ($600 million).
Excluding notable items, non-interest income decreased $208 million or 8% from the exit of the Hastings business,
reduced net wealth management and insurance income and lower trading income.
Net fee income
Net fee income decreased $191 million or 19% compared to First Half 2018 primarily from a $165 million increase
in provisions for notable items mostly related to financial planning. Excluding notable items, net fee income
reduced $26 million mainly from:
• Lower advice revenue, due to reduction in planner numbers and lower activity (down $16 million); and
• Lower business lending, mortgage and personal lending fees due largely to reduced new lending ($16 million);
partly offset by
• Higher credit card income from reduced reward costs and an increase in scheme support payments.
Net wealth management and insurance income
Net wealth management and insurance income decreased $606 million or 65% compared to First Half 2018,
impacted by additional provisions for notable items (mostly related to financial planning) of $435 million. Excluding
the notable items, net wealth management and insurance income was down $171 million or 18% due to:
• Following the exit of the Hastings business, revenue reduced to nil (down $32 million);
• Lower insurance income ($62 million) from:
- A reduction in general insurance income (down $61 million) from higher claims, including the NSW hailstorm
and Queensland floods; and
- Lower LMI income (down $7 million) primarily from a reduction in loans written at higher LVR bands; partly
offset by
- Life insurance was up $6 million supported by higher net earned premiums, partly offset by higher claims.
• Lower Platforms and Superannuation income (down $39 million) due to margin compression from pricing
changes to platforms, product mix changes, competition and lower average funds from legacy platform
outflows; and
• Cessation of grandfathered commission payments ($21 million).
Trading income
Trading income decreased $43 million or 8% compared to First Half 2018, primarily driven by lower customer
income, lower non-customer income and the derivative valuation adjustment. Refer to Section 2.2.7 for further
detail on Markets related income.
Other income
Other income increased $32 million or 46% compared to First Half 2018, mostly from asset sales, partly offset by
the impact of hedging New Zealand earnings.
2019 Interim financial results
Review of Group operations
30 | Westpac Group 2019 Interim Financial Results Announcement
2.2.6 Group funds
As at
As at
As at
% Mov't % Mov't
31 March 30 Sept 31 March Mar 19 - Mar 19 -
$bn 2019 2018 2018 Sept 18 Mar 18
Superannuation 38.9 39.3 37.4 (1) 4
Platforms 120.8 122.9 118.6 (2) 2
Packaged Funds 39.8 39.6 38.0 1 5
Other 3.6 3.8 3.7 (5) (3)
New Zealand (A$) 10.4 9.8 9.7 6 7
Total funds (excluding Westpac Institutional Bank) 213.5 215.4 207.4
(1) 3
Westpac Institutional Bank - - 6.6 - (100)
Total Group funds 213.5 215.4 214.0
(1) -
Average funds (excluding Westpac Institutional Bank)
207.3 214.9 207.6 (4) -
Westpac Institutional Bank - 2.4 9.7 (100) (100)
Average funds for the Group
1
207.3 217.3 217.3
(5) (5)
Funds are discussed in Section 3.3 and Section 3.5.
1
Averages are based on a six month period.
2019 Interim financial results
Review of Group operations
Westpac Group 2019 Interim Financial Results Announcement | 31
2.2.7 Markets related income
1
% Mov't % Mov't
Half Year Half Year Half Year Mar 19 - Mar 19 -
$m March 19 Sept 18 March 18 Sept 18 Mar 18
Net interest income 68 66 63 3 8
Non-interest income 486 456 547 7 (11)
Total Markets income 554 522 610
6 (9)
Customer income 438 448 448 (2) (2)
Non-customer income 127 60 162 112 (22)
Derivative valuation adjustments (11) 14 - large -
Total Markets income 554 522 610
6 (9)
Markets income comprises sales and risk management revenue derived from the creation, pricing and distribution
of risk management products to the Group’s consumer, business, corporate and institutional customers. Dedicated
relationship specialists provide product solutions to these customers to help manage their interest rate, foreign
exchange, commodity, credit and structured products risk exposures.
First Half 2019 - Second Half 2018
Total markets income increased $32 million or 6% compared to Second Half 2018 due to an increase in non-
customer income.
Customer income decreased 2%, driven by lower foreign exchange revenue.
Non-customer income increased $67 million compared to Second Half 2018, primarily due to higher foreign
exchange and commodities income.
Derivative valuation adjustments were $25 million lower in the half.
First Half 2019 – First Half 2018
Total markets income decreased $56 million or 9% compared to the First Half 2018, primarily due to lower non-
customer income.
Customer income decreased 2% compared to First Half 2018 mainly driven by lower foreign exchange revenue.
Non-customer income decreased $35 million or 22% compared to First Half 2018, due to lower foreign exchange
and commodities income in First Half 2019.
Markets Value at Risk (VaR)
2
$m
Average
High Low
Six months ended 31 March 2019 9.6 17.5 6.3
Six months ended 30 September 2018 10.8 27.1 7.0
Six months ended 31 March 2018 9.0 19.9 3.8
The Components of Markets VaR are as follows:
Average
Half Year Half Year Half Year
$m March 19 Sept 18 March 18
Interest rate risk 3.2 2.7 2.7
Foreign exchange risk 2.0 2.4 1.5
Equity risk - - 0.1
Commodity risk
3
8.1 6.6 6.4
Credit and other market risks
4
2.8 4.4 2.6
Diversification benefit (6.5) (5.3) (4.3)
Net market risk 9.6 10.8 9.0
1
Markets income includes WIB Markets, Business Bank, Consumer Bank, BTFG and Westpac New Zealand markets.
2
The daily VaR presented above reflects a WIB divisional view of VaR. It varies from presentations of VaR in Westpac’s 2018 Annual
Report and Australian Prudential Standard (APS) 330 Prudential Disclosure under Basel III where market risk disclosures are
segregated into trading and banking book. VaR measures the potential for loss using a history of price volatility.
3
Includes electricity risk.
4
Includes pre-payment risk and credit spread risk (exposures to generic credit rating bonds).
2019 Interim financial results
Review of Group operations
32 | Westpac Group 2019 Interim Financial Results Announcement
2.2.8 Operating expenses
1, 2
% Mov't % Mov't
Half Year Half Year Half Year Mar 19 - Mar 19 -
$m March 19 Sept 18 March 18 Sept 18 Mar 18
Staff expenses (2,624) (2,518) (2,419) 4 8
Occupancy expenses (497) (477) (475) 4 5
Technology expenses (1,139) (1,086) (1,058) 5 8
Other expenses (781) (926) (739) (16) 6
Total operating expenses (5,041) (5,007) (4,691)
1 7
Add back notable items 274 112 - 145 -
Total operating expenses excluding notable items (4,767) (4,895) (4,691)
(3) 2
First Half 2019 – Second Half 2018
Operating expenses increased $34 million or 1% compared to Second Half 2018. Excluding the impact of
increases in estimated costs associated with implementing customer refunds and payments, and the wealth
strategy reset (notable items) of $162 million, operating expenses reduced 3%. The 3% reduction reflected the exit
of the Hastings business ($121 million), with other expenses little changed (down $7 million) as operating costs
growth, the impact of the Group’s investment programs and higher regulatory and compliance expenses were
offset by $146 million of productivity benefits.
Staff expenses increased $106 million or 4% during the half. Excluding notable items (up $171 million), staff
expenses decreased $65 million primarily due to a 3% decrease in average FTE from delivery of productivity
initiatives related to organisation simplification and channel optimisation. This was partly offset by annual salary
increases effective from January 2019 and the Group’s investment programs having a higher proportion of spend
expensed in the half.
Occupancy expenses increased $20 million or 4% compared to Second Half 2018. As part of our productivity
program, the Group incurred costs related to branch closures, with branch numbers across the Group down 38 in
the half. Productivity benefits from property consolidation offset rental increases across retail and corporate sites.
Technology expenses increased $53 million or 5% compared to Second Half 2018. Excluding notable items (up
$20 million), technology expenses increased $33 million from higher technology services and software
maintenance and licensing costs to support the Group’s technology infrastructure, cyber security and customer
service hub.
Other expenses decreased $145 million or 16%, with notable items down $29 million compared to Second Half
2018. Excluding these items, other expenses decreased $116 million primarily from the exit of the Hastings
business ($92 million) and lower regulatory and compliance costs (down $49 million) including lower Royal
Commission costs. This was partly offset by higher marketing and Group insurance costs.
First Half 2019 – First Half 2018
Operating expenses increased $350 million or 7% compared to First Half 2018, with an increase in estimated
costs associated with implementing customer refunds and payments, and the wealth strategy reset (notable items)
contributing $274 million. Excluding notable items, operating expenses increased 2% primarily from higher
investment related spend ($97 million) largely across banking and wealth platforms, scheme investments and
enhancements to the Group’s technology infrastructure. In addition, regulatory and compliance costs were up
$69 million primarily due to regulatory change investments. Productivity benefits of $319 million more than offset
growth in operating costs.
Staff expenses increased $205 million or 8% compared to First Half 2018 including the impact from notable items
(up $208 million). Excluding notable items, staff expenses were flat with the impact from annual salary increases
and higher investment spend offset by a 3% decrease in average FTE from productivity initiatives, lower bonuses
and the exit of the Hastings business.
Occupancy expenses increased $22 million or 5% compared to First Half 2018, primarily due to annual rental
increases and costs associated with branch and ATM rationalisation. This was partly offset by benefits from the
reduction in branch numbers (down 58).
1
Refer to Section 4, Note 5 for reported results breakdown. Refer to Section 5, Note 5 for cash earnings breakdown. As discussed in
Section 1.3, commentary is on a cash earnings basis.
2
The Group has adopted AASB 9 Financial Instruments and AASB 15 Revenue from Contracts with Customers from 1 October 2018.
Statutory comparatives have not been restated. Refer to Note 1 in Section 4 for further detail. However, where applicable, cash
earnings comparatives (excluding expected credit loss provisioning) have been restated to aid comparability. Refer to the Cash
earnings policy in Section 1.3.4 for further detail. In addition, during First Half 2019, the Group has made a number of presentational
changes to the Balance Sheet and Income Statement. Both statutory and cash earnings comparatives have been restated. Refer to
Note 1 in Section 4 for further detail.
2019 Interim financial results
Review of Group operations
Westpac Group 2019 Interim Financial Results Announcement | 33
Technology expenses increased $81 million or 8%. Excluding notable items (up $20 million), technology expenses
increased $61 million or 6% largely from the impact of the Group’s investment programs. Higher amortisation of
software assets (up $17 million) and an increase in technology services costs ($47 million) was largely driven from
investments including cyber security, key platform programs and enhancement to the Group’s technology
infrastructure.
Other expenses increased $42 million or 6%, with notable items contributing $46 million. Excluding these items,
other expenses were little changed with a decrease in non-lending losses and impact from the exit of the Hastings
business, mostly offset by higher marketing and Group insurance costs.
Full Time Equivalent (FTE) employees
As at
As at
As at
% Mov't % Mov't
31 March 30 Sept 31 March Mar 19 - Mar 19 -
Number of FTE 2019 2018 2018 Sept 18 Mar 18
Permanent employees 31,007 31,672 32,033 (2) (3)
Temporary employees 3,234 3,357 3,687 (4) (12)
FTE 34,241 35,029 35,720
(2) (4)
Average FTE
1
34,344 35,362 35,446
(3) (3)
First Half 2019 – Second Half 2018
FTE decreased 788 or 2% in the half from delivery of productivity initiatives across the Group, including
organisation simplification and channel optimisation.
First Half 2019 – First Half 2018
FTE decreased 1,479 compared to First Half 2018. Delivery of productivity initiatives across the year, more than
offset additional resources required for regulatory and compliance related activities.
Investment spend
% Mov't % Mov't
Half Year Half Year Half Year Mar 19 - Mar 19 -
$m March 19 Sept 18 March 18 Sept 18 Mar 18
Expensed
2
331 312 271 6 22
Capitalised software and fixed assets 392 494 387 (21) 1
Total 723 806 658
(10) 10
Growth and productivity 401 479 411 (16) (2)
Regulatory change 195 214 163 (9) 20
Other technology 127 113 84 12 51
Total 723 806 658
(10) 10
The Group invested $723 million in First Half 2019, of which 55% was spent on growth and productivity initiatives,
27% on regulatory change and 18% on other technology programs.
The lower investment spend in First Half 2019 compared to Second Half 2018 was principally due to the
completion of some transformation and productivity initiatives. Other technology costs were higher associated with
enhancing system stability. Of the $723 million investment in First Half 2019, 46% was expensed while 54% was
capitalised.
Over the prior corresponding period investment spend was 10% higher due to increasing investment in regulatory
change and other technology.
Across the major investment categories the following progress was achieved in First Half 2019:
Growth and productivity
• Platform modernisation
- Customer Service Hub (CSH) is our major program seeking to implement a one bank, multi-brand operating
system creating a better experience for both customers and bankers. Launch for Westpac mortgages has
commenced, with remaining retail and regional brands to launch in late 2019 and broker applications will
commence in 2020;
1
Averages are based on a six month period.
2
Comparatives have been restated.
2019 Interim financial results
Review of Group operations
34 | Westpac Group 2019 Interim Financial Results Announcement
- Real time payments on the New Payment Platform (NPP) were enabled nationally for 3.6 million consumer
accounts. Eligible customers can create a ‘PayID’ using their mobile number, enabling them to receive
payments without having to remember account numbers. Over 16 million Osko payments have been
successfully processed with a value of $12 billion. Rollout has commenced for Business and Institutional, with
St.George expected to commence in Second Half 2019;
- Launched Credit Connect, WIB’s new global system for origination and reporting on customers’ credit
exposures. It integrates into Westpac's other technology platforms, improving reliability, scalability and
functionality;
- Real time customer insights introduced to St.George, enabling analytic teams to understand customer activity
real time across devices; and
-
Additional Panorama capabilities were delivered, including BT Invest where customers can choose from a
simplified selection of managed funds, managed portfolios, term deposits and shares. BT Super Invest allows
customers to invest super themselves beyond traditional investment options online. BT SMSF service
facilitates the setup of SMSF, bank account and investment platform. Real-time electronic ID verification for
new customers significantly decreases the time to open an account.
• Digitising the company
- Launched a range of new features for customers to make banking easier, including credit card limit reduction
functionality, straight through processing of term deposit roll overs, online invoice solution provides customers
with a free service to create, preview and send invoices to their customers. Deposit rate finder provides an
interest rate taking into account a customer's total deposits and relationship with the bank and introducing
least-cost routing for merchant customers;
- Launch of Google Pay for St.George, a mobile wallet solution that allows credit card customers to make
secure, contactless payments from their Android device and load eligible credit, debit, loyalty and gift cards to
their wallet; and
- 2.4 million Westpac customers now have access to Westpac's live chat virtual assistant with 130,000
customers having used the feature resolving 78% of enquiries.
• Reducing complexity
- 8.8 million customers have access to Digital mailbox allowing them to receive letters and bank
correspondence electronically, saving paper on 911,000 customer letters.
Regulatory change
Major developments over the half included:
• Delivered a number of regulatory and industry requirements including the transition to AASB 9, transitioned
under the new external disputes resolution scheme the Australian Financial Complaints Authority, enhanced
whistleblower protections, completed a number of BT regulatory reporting enhancements and publication of the
Future of Customers Underlying Super (FOCUS) transition plan to adopt the Insurance in Superannuation
Code of Practice; and
• Continued the update of systems and processes to comply with conveyancing industry changes further
broadening electronic land title lodgement usage, delivered changes to remove car finance flex commissions,
and continued to progress Open Banking.
Other technology
Major initiatives under this category included further upgrades to the Group’s infrastructure, migration of further
applications onto cloud technologies, reducing cyber risks and enhancements to workplace technologies that
support more flexible working.
2019 Interim financial results
Review of Group operations
Westpac Group 2019 Interim Financial Results Announcement | 35
Capitalised software
% Mov't % Mov't
Half Year Half Year Half Year Mar 19 - Mar 19 -
$m March 19 Sept 18 March 18 Sept 18 Mar 18
Opening balance 2,177 2,005 1,916 9 14
Total additions
1
395 493 389 (20) 2
Amortisation expense (318) (317) (301) - 6
Impairment expense (16) - (2) - large
Foreign exchange translation 6 (4) 3 large 100
Closing balance 2,244 2,177 2,005
3 12
Capitalised software increased 3% over the half and 12% compared to First Half 2018. This in part, reflects a
higher proportion of investment spend on larger infrastructure programs (CSH, NPP, Panorama) which have a
longer assessed life. At the same time, a number of projects remain in development and amortisation has yet to
fully commence.
Software amortisation was $1 million higher compared to Second Half 2018 and $17 million (6%) higher than
First Half 2018. As part of the Group’s regular asset review, $16 million of capitalised software was written off in
First Half 2019. In aggregate, the average amortisation of our capitalised software assets was 3.4 years.
1
Includes capitalised borrowing costs.
2019 Interim financial results
Review of Group operations
36 | Westpac Group 2019 Interim Financial Results Announcement
2.2.9 Impairment charges
1
% Mov't % Mov't
Half Year Half Year Half Year Mar 19 - Mar 19 -
$m March 19 Sept 18 March 18 Sept 18 Mar 18
Individually assessed provisions (IAPs)
New IAPs (173) (198) (173) (13) -
Write-backs 79 83 67 (5) 18
Recoveries 71 85 107 (16) (34)
Total IAPS, writebacks and recoveries (23) (30) 1
(23) large
Collectively assessed provisions (CAPs)
Write-offs (418) (428) (430) (2) (3)
Other changes in CAPs 108 90 (15) 20 large
Total new CAPs (310) (338) (445)
(8) (30)
Impairment charges (333) (368) (444)
(10) (25)
Asset quality remained sound through First Half 2019 with stressed exposures to total committed exposures (TCE)
increasing by 2 basis points to 1.10%. The increase in stressed exposures was due to higher impaired and higher
90+ days but not impaired facilities partially offset by a decline in watchlist and substandard exposures. Emerging
stress is mostly due to an increase in mortgage and unsecured delinquencies due to both the softening of
economic activity and, for unsecured delinquencies, normal seasonal increases.
Given little change in asset quality, impairment charges have remained low at $333 million in First Half 2019, equal
to 9 basis points of gross loans.
First Half 2019 – Second Half 2018
Impairment charges for First Half 2019 were $333 million, down $35 million compared to Second Half 2018. The
decline was mostly due to lower total new CAPs from lower new stress in the Business Bank and a reduction in
the centrally held overlays. These were partially offset by higher provisions linked to an increase in consumer
delinquencies.
Key movements included:
• Total IAPs, write-backs and recoveries were $7 million lower than Second Half 2018 principally due to:
- New IAPs were $25 million lower compared to Second Half 2018 mostly from a lower level of new impaired
exposures in Business Bank and New Zealand. These declines were partially offset by one facility greater
than $50 million (in WIB) that migrated to impaired in the half from watchlist and substandard; and
- Write-backs and recoveries were $18 million lower over the half principally from lower recoveries in the
Australian unsecured portfolio and the New Zealand business portfolio. Write-backs were marginally lower.
• Total new CAPs were $28 million lower than Second Half 2018. Key movements included:
- Write-offs were $10 million lower in First Half 2019, consistent with normal seasonal patterns in unsecured
personal lending. This was partly offset by higher write-offs in the auto finance portfolio as operational issues
in Second Half 2018 were partially resolved through First Half 2019;
- Benefits from other changes in CAPs were $18 million higher:
o The overlay provision was $38 million lower as provisions were utilised or no longer required for the
manufacturing and mining segments. The overlay for agriculture in Australia was increased due to
persistent drought conditions in much of the country; and
o Lower new stress in the Business Bank, partly offset by
o An increase in provision charges for the Australian mortgage portfolio related to increases in 90+ day
delinquencies.
1
The Group has adopted AASB 9 Financial Instruments and AASB 15 Revenue from Contracts with Customers from 1 October 2018.
Statutory comparatives have not been restated. Refer to Note 1 in Section 4 for further detail. However, where applicable, cash
earnings comparatives (excluding expected credit loss provisioning) have been restated to aid comparability. Refer to the cash
earnings policy in Section 1.3.4 for further detail. In addition, during First Half 2019, the Group has made a number of presentational
changes to the Balance Sheet and Income Statement. Both statutory and cash earnings comparatives have been restated. Refer to
Note 1 in Section 4 for further detail.
2019 Interim financial results
Review of Group operations
Westpac Group 2019 Interim Financial Results Announcement | 37
First Half 2019 – First Half 2018
Impairment charges of $333 million were down $111 million when compared to First Half 2018.
Key movements included:
• Total new IAPs, write-backs and recoveries were $24 million lower than First Half 2018. This was due to lower
recoveries partially offset by higher write-backs. The reduction in recoveries was primarily due to the Australian
unsecured portfolios; and
• Total new CAPs were $135 million lower due to a $123 million reduction from other changes in CAPs and a
$12 million reduction in write-offs principally in unsecured lending. Within other changes in CAPs, the overlay
was reduced $38 million in First Half 2019 compared to a $12 million increase in First Half 2018.
2.2.10 Income tax expense
First Half 2019 – Second Half 2018
The effective tax rate of 30.2% in First Half 2019 is lower than the 31.3% in Second Half 2018. The higher
effective tax rate in Second Half 2018 reflects the non-deductibility of certain expenses including penalties and the
write-off of the Hastings goodwill associated with the exit of that business in Second Half 2018.
First Half 2019 – First Half 2018
The effective tax rate of 30.2% in First Half 2019 is slightly lower than the 30.3% recorded in First Half 2018. The
effective tax rate is above the Australian corporate tax rate of 30% and reflects several Tier 1 Instruments whose
distributions are not deductible for Australian taxation purposes.
2.2.11 Non-controlling interests
Non-controlling interests represent results of non-wholly owned subsidiaries attributable to shareholders other than
Westpac. These include profits attributable to the 10.1% shareholding in Westpac Bank-PNG-Limited and the 25%
shareholding in St.George Motor Finance Limited that are not owned by Westpac.
2019 Interim financial results
Review of Group operations
38 | Westpac Group 2019 Interim Financial Results Announcement
2.3 Credit quality
Credit quality remained sound over First Half 2019 with total stressed exposures to TCE increasing modestly and
remaining low relative to historical experience. Stressed exposures to TCE were 1.10%, 2 basis points higher than
Second Half 2018 and 1 basis point higher compared to First Half 2018 (see 2.3.1 Credit quality key metrics).
The 2 basis points rise in stressed exposures relates to increases in both 90 days past due and not impaired
(4 basis points) and to impaired exposures (3 basis points) partially offset by a reduction in watchlist and
substandard (5 basis points) facilities. The increase in 90 day past due and not impaired was due mainly to an
increase in mortgage 90+ day delinquencies. The reduction in watchlist and substandard was primarily due to the
downgrade to impaired of one exposure greater than $50 million and the repayment of another exposure. The
increase in impaired exposures saw the ratio of gross impaired exposures to gross loans 4 basis points higher at
0.24% compared to Second Half 2018.
Provisioning levels increased $989 million following the introduction of AASB 9 on 1 October 2018 at
$4,042 million. Over First Half 2019, total provisions were $47 million lower ending the period at $3,995 million. At
31 March 2019, the ratio of gross impaired asset provisions to gross impaired exposures was 45.7% while the ratio
of collectively assessed provisions to credit risk weighted assets increased to 98 basis points with the rise due to
the introduction of AASB 9.
Portfolio segments
The institutional segment continued to perform well – with only one new large (greater than $50 million) facility
downgraded to impaired during First Half 2019. It has been two years since a facility of this size has migrated to
impaired. This facility is within the retail segment and was downgraded from the watchlist and substandard
category.
There has been no significant deterioration in credit quality across other industry segments over the half, as most
movements in stressed exposures by industry related to movements in one or two facilities. The quality of the
commercial property sector has continued to improve as a result of decisions to tighten the standards on new
lending over recent years. At 31 March 2019 the level of stressed exposures to TCE was 1.5% and remains well
below long term averages with stress decreasing modestly (down from 1.7%) over the half.
The small and medium business portfolio has also continued to perform well. In First Half 2019 the Group has
seen overall stress reduce. Within stress, a number of small companies have been downgraded leading to a small
rise in the proportion of impaired exposures and 90 days past due not impaired exposures.
The New Zealand business portfolio continues to perform well with stable stressed exposures ratios over First Half
2019. However, there has been a small increase in stressed facilities in the dairy portfolio reflecting the challenges
smaller scale customers have in deleveraging.
Australian mortgage 90+ day delinquencies are 0.82%, 10 basis points higher over the half. The main drivers of
the increase in mortgage delinquencies have been the deterioration in the operating environment, with weak
growth and low consumer income growth, and falling house prices (particularly in Sydney and Melbourne). Over
the last six months there has been an increase in customers utilising hardship while slower market turnover has
contributed to accounts remaining delinquent for longer periods as properties become more difficult to sell. Lower
new mortgage growth and the compositional shift towards principal and interest mortgages (which have higher
inherent delinquencies than interest only lending) has also contributed to higher delinquencies. The rise in
delinquencies has been highest in WA and Qld although delinquencies in NSW and Vic have risen from a low
base. While NSW and Vic delinquencies remain below the portfolio average, as these states account for a large
portion of the Group’s portfolio, they had the largest impact on overall delinquencies.
Australian properties in possession increased over the half by 86 to 482 at 31 March 2019 due principally to those
states and regions impacted by the slowing of the mining investment cycle. The rise also reflects that with slow
market turnover it can take longer for properties in possession to be sold.
Realised mortgage losses were $52 million for First Half 2019, equivalent to 2 basis points. This compares to
$42 million in Second Half 2018 and $47 million in First Half 2018.
Consumer unsecured delinquencies were also higher over First Half 2019. Total Australian other consumer 90+
day delinquencies were 1.87%, up 14 basis points since Second Half 2018 and were 16 basis points higher
compared to First Half 2018. Around 11 basis points of the increase compared to First Half 2018 was due to
portfolio run off, particularly in the Auto portfolio. The increase over the half was due to both seasonal trends and
portfolio run off.
New Zealand mortgage 90+ day delinquencies increased 3 basis points to 0.14% from Second Half 2018 and
were 2 basis points lower than First Half 2018. While delinquencies were higher, they remain at or near historical
lows and reflect the more favourable economic conditions in New Zealand and prior macro-prudential rules that
limited the amount of high loan to value ratio (>80%) lending.
2019 Interim financial results
Review of Group operations
Westpac Group 2019 Interim Financial Results Announcement | 39
New Zealand unsecured delinquencies were also higher at 1.02% and have also increased due to portfolio run off.
Other consumer 90+ day delinquencies increased 40 basis points since Second Half 2018 and were 16 basis
points higher than First Half 2018.
Provisioning
Provisioning levels increased $989 million following the introduction of AASB 9 on 1 October 2018 to
$4,042 million. Over the period provisions were $47 million lower to $3,995 million with:
• CAPs were $58 million lower at $3,562 million compared to Second Half 2018 from lower centrally held
overlays and lower provisions in both the Institutional and Business Banks from a reduction in stress. These
declines were partially offset by higher provisions for delinquencies in the Australian Mortgage portfolio. Within
collectively assessed provisions, the overlay reduced ($38 million) to $229 million at 31 March 2019.
• IAPs were $11 million higher at $433 million from the small rise in impaired exposures.
2.3.1 Credit quality key metrics
As at As at As at
31 March 30 Sept 31 March
2019 2018 2018
Stressed exposures by credit grade as a % of TCE:
Impaired
0.17%
0.14% 0.15%
90 days past due and not impaired
0.43%
0.39% 0.37%
Watchlist and substandard
0.50%
0.55% 0.57%
Total stressed exposures
1.10%
1.08% 1.09%
Gross impaired exposures to TCE for business and institutional:
Business Australia
1
0.59%
0.54% 0.55%
Business New Zealand
0.41%
0.50% 0.74%
Institutional 0.05%
0.02% 0.04%
Mortgage 90+ day delinquencies:
Group
0.75%
0.67% 0.65%
Australia
0.82%
0.72% 0.69%
New Zealand
0.14%
0.11% 0.16%
Other consumer loans 90+ day delinquencies:
Group 1.80%
1.64% 1.64%
Australia 1.87%
1.73% 1.71%
New Zealand 1.02%
0.62% 0.86%
Other:
Gross impaired exposures to gross loans 0.24%
0.20% 0.22%
Gross impaired exposures provisions
2
to gross impaired exposures 45.74%
46.12% 45.54%
Total loan provisions
2
to gross loans 56bps
43bps 45bps
Collective assessed provisions
2
to credit risk weighted assets 98bps
73bps 75bps
Total provisions to credit risk weighted assets 110bps
84bps 88bps
Loan impairment charges to average gross loans annualised
3
9bps
10bps 13bps
Net write-offs to average gross loans annualised
3
12bps
14bps 13bps
1
Comparatives have been restated.
2
The Group has adopted AASB 9 Financial Instruments and AASB 15 Revenue from Contracts with Customers from 1 October 2018.
Statutory comparatives have not been restated. Refer to Note 1 in Section 4 for further detail. However, where applicable, cash
earnings comparatives (excluding expected credit loss provisioning) have been restated to aid comparability. Refer to the cash
earnings policy in Section 1.3.4 for further detail. In addition, during First Half 2019, the Group has made a number of presentational
changes to the Balance Sheet and Income Statement. Both statutory and cash earnings comparatives have been restated. Refer to
Note 1 in Section 4 for further detail.
3
Averages are based on a six month period.
2019 Interim financial results
Review of Group operations
40 | Westpac Group 2019 Interim Financial Results Announcement
2.3.2 Movement in gross impaired exposures
As at
As at
As at
% Mov't % Mov't
31 March 30 Sept 31 March Mar 19 - Mar 19 -
$m 2019 2018 2018 Sept 18 Mar 18
Opening balance 1,416 1,535 1,542 (8) (8)
New and increased - individually managed 519 450 471 15 10
Write-offs (499) (593) (534) (16) (7)
Returned to performing or repaid (378) (393) (387) (4) (2)
Portfolio managed - new/increased/returned/repaid 701 413 442 70 59
Exchange rate and other adjustments (10) 4 1 large large
Balance as at period end 1,749 1,416 1,535
24 14
2019 Interim financial results
Review of Group operations
Westpac Group 2019 Interim Financial Results Announcement | 41
2.4 Balance sheet and funding
2.4.1 Balance sheet
1
As at
As at
As at
% Mov't % Mov't
31 March 30 Sept 31 March Mar 19 - Mar 19 -
$m 2019 2018 2018 Sept 18 Mar 18
Assets
Cash and balances with central banks 19,486 26,788 21,932 (27) (11)
Collateral paid 6,103 4,787 3,835 27 59
Trading securities and financial assets measured at fair value
through income statement (FVIS), available-for-sale
securities and investment securities 97,843 84,251 86,450 16 13
Derivative financial instruments 21,765 24,101 26,904 (10) (19)
Loans 714,297 709,690 701,393 1 2
Life insurance assets 9,374 9,450 10,481 (1) (11)
Other assets 22,194 20,525 20,860 8 6
Total assets 891,062 879,592 871,855
1 2
Liabilities
Collateral received 1,889 2,184 3,331 (14) (43)
Deposits and other borrowings 555,007 559,285 547,736 (1) 1
Other financial liabilities 29,013 28,105 29,750 3 (2)
Derivative financial instruments 23,384 24,407 24,066 (4) (3)
Debt issues 188,759 172,596 174,138 9 8
Life insurance liabilities 7,503 7,597 8,763 (1) (14)
Loan capital 16,736 17,265 18,333 (3) (9)
Other liabilities 4,836 3,580 3,073 35 57
Total liabilities 827,127 815,019 809,190
1 2
Equity
Total equity attributable to owners of Westpac Banking Corporation 63,884 64,521 62,615 (1) 2
Non-controlling interests 51 52 50 (2) 2
Total equity 63,935 64,573 62,665
(1) 2
First Half 2019 – Second Half 2018
Key movements during the half included:
Assets
• Cash and balances with central banks decreased $7.3 billion or 27% reflecting lower liquid assets held in this
form;
• Collateral paid increased $1.3 billion or 27% mainly due to an increase in collateralised derivative liabilities;
• Trading securities and financial assets measured at FVIS, available-for-sale securities and investment
securities increased $13.6 billion or 16% reflecting higher balances held in this form;
• Derivative assets decreased $2.3 billion or 10% mainly driven by movements in cross currency swaps and
foreign currency forward contracts, partly offset by an increase in interest rate swaps; and
• Loans grew $4.6 billion or 1%. Refer to Section 2.2.2 Loans for further information.
1
The Group has adopted AASB 9 Financial Instruments and AASB 15 Revenue from Contracts with Customers from 1 October 2018.
Statutory comparatives have not been restated. Refer to Note 1 in Section 4 for further detail. However, where applicable, cash
earnings comparatives (excluding expected credit loss provisioning) have been restated to aid comparability. Refer to the cash
earnings policy in Section 1.3.4 for further detail. In addition, during First Half 2019, the Group has made a number of presentational
changes to the Balance Sheet and Income Statement. Both statutory and cash earnings comparatives have been restated. Refer to
Note 1 in Section 4 for further detail.
2019 Interim financial results
Review of Group operations
42 | Westpac Group 2019 Interim Financial Results Announcement
Liabilities
• Deposits and other borrowings decreased $4.3 billion or 1%. Refer to Section 2.2.3 Deposits and other
borrowings for further information;
• Other financial liabilities increased $0.9 billion or 3% mainly driven by securities sold under agreements to
repurchase;
• Derivative liabilities decreased $1.0 billion or 4% driven by movements in foreign currency forward contracts,
partly offset by increases in cross currency swaps and interest rate swaps;
• Debt issues increased $16.2 billion or 9% ($14.6 billion or 8% increase excluding foreign currency impacts).
Refer to Section 2.4.2 Funding and liquidity risk management for further information; and
• Loan capital decreased $0.5 billion or 3% mainly due to redemption of $1.0 billion Tier 2 capital instruments,
partly offset by hedging and foreign currency translation impacts of $0.4 billion.
Equity attributable to owners of Westpac Banking Corporation decreased $0.6 billion or 1% reflecting $0.7 billion
opening retained earnings adjustment due to the adoption of new accounting standards, dividends paid during the
period, partly offset by retained profits and shares issued under the final dividend reinvestment plan (DRP).
First Half 2019 – First Half 2018
Key movements included:
Assets
• Cash and balances with central banks decreased $2.4 billion or 11% reflecting lower liquid assets held in this
form;
• Collateral paid increased $2.3 billion or 59% mainly due to an increase in collateralised derivative liabilities;
• Trading securities and financial assets measured at FVIS, available-for-sale securities and investment
securities increased $11.4 billion or 13% reflecting higher balances held in this form;
• Derivative assets decreased $5.1 billion or 19% mainly driven by movements in cross currency swaps and
foreign currency forward contracts, partly offset by an increase in interest rate swaps;
• Loans grew $12.9 billion or 2%. Refer to Section 2.2.2 Loans for further information; and
• Life insurance assets decreased $1.1 billion or 11% mainly due to the redemptions of investments in
consolidated funds and transferred to non-consolidated funds in Second Half 2018.
Liabilities
• Collateral received decreased $1.4 billion or 43% due to a decrease in collateralised derivative assets;
• Deposits and other borrowings increased $7.3 billion or 1%. Refer to Section 2.2.3 Deposits and other
borrowings for further information;
• Other financial liabilities decreased $0.7 billion or 2% mainly driven by securities sold under agreements to
repurchase, securities sold short and securities purchased not delivered, partly offset by an increase in
int erbank deposits;
• Derivative liabilities decreased $0.7 billion or 3% driven by movements in foreign currency forward contracts,
partly offset by increases in cross currency swaps and interest rate swaps;
• Debt issues increased $14.6 billion or 8% ($6.8 billion or 4% increase excluding foreign currency impacts).
Refer to Section 2.4.2 Funding and liquidity risk management for further information;
• Life insurance liabilities decreased $1.3 billion or 14% due to the redemptions of investments in consolidated
funds and transferred to non-consolidated funds in Second Half 2018; and
• Loan capital decreased $1.6 billion or 9% mainly due to redemption of $1.0 billion Tier 2 capital instruments
and the conversion of the remaining $0.6 billion Westpac Convertible Preference Shares into ordinary shares.
Equity attributable to owners of Westpac Banking Corporation increased $1.3 billion or 2% reflecting retained
profits less dividends paid during the period, shares issued under the 2018 interim DRP and 2018 final DRP, and
the conversion of some convertible preference shares to ordinary share capital, partly offset by $0.7 billion
opening retained earnings adjustment due to the adoption of new accounting standards.
2019 Interim financial results
Review of Group operations
Westpac Group 2019 Interim Financial Results Announcement | 43
2.4.2 Funding and liquidity risk management
Liquidity risk is the risk that the Group will be unable to fund assets and meet obligations as they become due.
This type of risk is inherent for all banks through their role as intermediaries between depositors and borrowers.
The Group has a liquidity risk management framework which seeks to meet the objective of meeting cash flow
obligations under a wide range of market conditions, including name specific and market-wide stress scenarios, as
well as meeting the regulatory requirements of the LCR and NSFR
1
.
In First Half 2019 the Group maintained an appropriate funding and liquidity profile. Key measures of balance
sheet strength and funding and liquidity metrics remained comfortably above regulatory minimums at 31 March
2019, including an LCR of 138% and an NSFR of 113%.
LCR
The LCR requires banks to hold sufficient High Quality Liquid Assets (HQLA), as defined, to withstand 30 days
under a regulator-defined acute stress scenario. HQLA include cash, deposits with central banks, government
securities and other high quality securities that are repo-eligible with the Reserve Bank of Australia (RBA).
The Group holds a portfolio of HQLA which it manages within the Group’s risk appetite and in accordance with
regulatory requirements. As at 31 March 2019, this portfolio was $79.7 billion (30 September 2018: $76.5 billion).
In addition to its portfolio of HQLA, the Group also has access to the Committed Liquidity Facility (CLF) in order to
meet the requirements of the LCR. The RBA, jointly with APRA, makes the CLF available to ADIs due to the
limited amount of government debt in Australia. In order to have access to the CLF, ADIs must satisfy qualifying
conditions and are required to pay a fee of 15 basis points (0.15%) per annum to the RBA on the approved
undrawn facility. APRA approved Westpac’s CLF allocation of $54 billion for the 2019 calendar year (2018
calendar year: $57 billion).
The Group’s LCR as at 31 March 2019 was 138% (30 September 2018: 133%) and the average LCR for the
quarter ended 31 March 2019 was 134%
2
.
NSFR
The Group is required to maintain a NSFR, designed to encourage longer-term funding resilience, of at least
100%. The NSFR came into effect for Australian ADIs on 1 January 2018. Westpac had a NSFR of 113% at
31 March 2019 (30 September 2018: 114%). The ratio has remained relatively stable since 30 September 2018 as
an increase in loans was funded by an increase in wholesale funding.
Funding
The Group monitors the composition and stability of its funding so that it remains within the Group’s funding risk
appetite. This includes compliance with both the LCR and NSFR.
The Group’s funding composition was little changed over the half. While customer deposits as a proportion of total
funding decreased by 152 basis points to 61.6% (30 September 2018: 63.1%), this was partly offset by an
increase in the proportion of long term funding to total funding of 26 basis points to 15.9% (30 September 2018:
15.7%), as well as securitisation (up 22 basis points to 1.1%). Equity to total funding remained relatively stable.
Short term wholesale funding as a proportion of total funding increased by 122 basis points to 13.7%
(30 September 2018: 12.4%), including a 26 basis point increase in the amount of long term funding with less than
one year residual maturity. As at 31 March 2019, the Group’s short term funding portfolio (including long term to
short term scroll) of $113.5 billion had a weighted average maturity of 157 days and was more than covered by the
$151.6 billion of unencumbered repo-eligible liquid assets held by the Group (including LCR liquid assets, private
securities and repo-eligible self-originated AAA rated mortgage backed securities).
The Group raised $21.7 billion of new long term wholesale funding in First Half 2019, positioning the Group ahead
of Full Year 2019 term funding needs. The majority of new issuance came in the form of senior unsecured and
covered bond format, in core currencies of AUD, USD and EUR. New term issuance also included $1.4 billion of
Basel III compliant Additional Tier 1 capital instruments.
During the half, the weighted average maturity (excluding securitisation) of new term issuance was 4.7 years,
slightly shorter compared to Full Year 2018 (6.5 years) and reflecting benchmark transactions with two to three
year duration.
1
Refer to Glossary for definition.
2
Calculated as a simple average of the daily observations over the 31 March 2019 quarter.
2019 Interim financial results
Review of Group operations
44 | Westpac Group 2019 Interim Financial Results Announcement
Liquidity coverage ratio
As at
As at
As at
% Mov't % Mov't
31 March 30 Sept 31 March Mar 19 - Mar 19 -
$m 2019 2018 2018 Sept 18 Mar 18
High Quality Liquid Assets (HQLA)
1
79,701 76,482 71,952 4 11
Committed Liquidity Facility (CLF)
1
54,000 57,000 57,000 (5) (5)
Total LCR liquid assets 133,701 133,482 128,952
- 4
Cash outflows in a modelled 30-day APRA defined
stressed scenario
Customer deposits 65,819 70,348 66,222 (6) (1)
Wholesale funding 11,741 9,570 8,411 23 40
Other flows
2
19,482 20,476 21,405 (5) (9)
Total 97,042 100,394 96,038
(3) 1
LCR
3
138% 133% 134%
large 351bps
Net stable funding ratio
As at
As at As at
% Mov't % Mov't
31 March 30 Sept 31 March
Mar 19 - Mar 19 -
$m 2019 2018 2018
Sept 18 Mar 18
Available stable funding 606,217 601,184 593,669 1 2
Required stable funding 536,414 529,463 529,100 1 1
Net stable funding ratio 113% 114%
112%
(54bps) 81bps
Funding by residual maturity
As at 31 March 2019
As at 30 Sept 2018
As at 31 March 2018
$m Ratio % $m Ratio % $m Ratio %
Wholesale funding
Less than 6 months 58,244 7.0 53,649 6.5 61,245 7.6
6 to 12 months 22,860 2.8 18,537 2.3 16,973 2.1
Long term to short term scroll
4
32,375 3.9 29,894 3.6 27,522 3.4
Wholesale funding - residual maturity less
than 12 months 113,479
13.7
102,080
12.4
105,740
13.1
Securitisation 9,472 1.1 7,588 0.9 8,186 1.0
Greater than 12 months 132,089 15.9 128,276 15.7 128,921 16.0
Wholesale funding - residual maturity greater
than 12 months 141,561
17.0
135,864
16.6
137,107
17.0
Customer deposits 511,643
61.6
517,751
63.1
502,063
62.1
Equity
5
64,347
7.7
64,978
7.9
63,225
7.8
Total funding 831,030
100.0
820,673
100.0
808,135
100.0
Deposits to net loans ratio
1
As at 31 March 2019
As at 30 Sept 2018
As at 31 March 2018
$m Ratio % $m Ratio % $m Ratio %
Customer deposits 511,643
517,751 502,063
Net loans 714,297 71.6
709,690 73.0 701,393 71.6
1
Refer to Glossary for definition.
2
Other flows include credit and liquidity facilities, collateral outflows and inflows from customers.
3
Calculated on a spot basis.
4
Scroll represents wholesale funding with an original maturity greater than 12 months that now has a residual maturity less than
12 months.
5
Includes total share capital, share based payments reserves and retained profits.
2019 Interim financial results
Review of Group operations
Westpac Group 2019 Interim Financial Results Announcement | 45
Funding view of the balance sheet
,
Total liquid Customer Wholesale Customer Market
$m assets
1
deposits funding franchise inventory Total
As at 31 March 2019
Total assets 151,588 - - 679,713 59,761 891,062
Total liabilities - (511,643) (255,040) - (60,444) (827,127)
Total equity - - - (64,347) 412 (63,935)
Total 151,588 (511,643) (255,040) 615,366 (271) -
Net loans
2
49,151 - - 665,146 - 714,297
As at 30 Sept 2018
Total assets 153,694 - - 668,237 57,661 879,592
Total liabilities - (517,751) (237,944) - (59,324) (815,019)
Total equity - - - (64,978) 405 (64,573)
Total 153,694 (517,751) (237,944) 603,259 (1,258) -
Net loans
2
55,500 - - 654,190 - 709,690
As at 31 March 2018
Total assets 147,634 - - 660,417 63,804 871,855
Total liabilities - (502,063) (242,847) - (64,280) (809,190)
Total equity - - - (63,225) 560 (62,665)
Total 147,634 (502,063) (242,847) 597,192 84 -
Net loans
2
55,058 - - 646,335 - 701,393
1
Refer to Glossary for definition.
2
Liquid assets in net loans include internally securitised assets that are eligible for repurchase agreements with the RBA / RBNZ.
2019 Interim financial results
Review of Group operations
46 | Westpac Group 2019 Interim Financial Results Announcement
2.5 Capital and dividends
As at
As at
As at
% Mov't % Mov't
31 March 30 Sept 31 March Mar 19 - Mar 19 -
2019 2018 2018 Sept 18 Mar 18
Level 2 Regulatory capital structure
Common equity Tier 1 capital after deductions ($m) 44,680 45,239 43,639 (1) 2
Risk weighted assets (RWA) ($m) 419,819 425,384 415,744 (1) 1
Common equity Tier 1 capital ratio (CET1) 10.64% 10.63% 10.50% 1bps 14bps
Additional Tier 1 capital ratio 2.20% 2.15% 2.31% 5bps (11bps)
Tier 1 capital ratio 12.84% 12.78% 12.81% 6bps 3bps
Tier 2 capital ratio 1.78% 1.96% 2.02% (18bps) (24bps)
Total regulatory capital ratio 14.62% 14.74% 14.83% (12bps) (21bps)
APRA leverage ratio
1
5.72% 5.84% 5.75% (12bps) (3bps)
Level 1 Common equity Tier 1 capital ratio (CET1) 10.72% 10.50% 10.40% 22bps 32bps
Capital management strategy
In light of APRA’s announcement on ‘unquestionably strong’ capital benchmarks on 19 July 2017, Westpac will
seek to operate with a CET1 capital ratio of at least 10.5% in March and September as measured under the
existing capital framework. This also takes into consideration:
• Current regulatory capital minimums and the capital conservation buffer (CCB), which together are the total
CET1 requirement. In line with the above, the total CET1 requirement for Westpac is at least 8.0%, based upon
an industry minimum CET1 requirement of 4.5% plus a capital buffer of at least 3.5% applicable to domestic
systemically important banks (D-SIBs)
2
;
• Stress testing to calibrate an appropriate buffer against a downturn; and
• Quarterly volatility of capital ratios due to the half yearly cycle of ordinary dividend payments.
Should the CET1 capital ratio fall below the total CET1 requirement, restrictions on the distribution of earnings will
apply. This includes restrictions on the amount of earnings that can be distributed through dividends, Additional
Tier 1 capital distributions and discretionary staff bonuses.
Westpac will revise its target capital level once APRA finalises its review of the capital adequacy framework.
Common Equity Tier 1 capital ratio movement for First Half 2019
Westpac’s CET1 capital ratio was 10.64% at 31 March 2019, up 1 basis point from 30 September 2018. This
included First Half 2019 cash earnings of $3,296 million (79 basis points). Cash earnings for First Half 2019 were
impacted by additional provisions for estimated customer refunds, payments and associated costs ($896 million
before tax), and provisions for costs associated with the reset of the Wealth strategy ($190 million before tax).
These remediation and restructuring costs are referred to as ‘notable items’. Excluding these notable items, which
reduced the CET1 ratio by 25 basis points
3
, organic capital growth was 27 basis points.
1
Refer Glossary for definition.
2
Noting that APRA may apply higher CET1 requirements for an individual ADI.
3
The impact of notable items on the CET1 ratio includes the capital deduction for the associated deferred tax assets.
Ordinary
RWA growth
Sept 18
10.64%
(7bps)
FX translation
impact
Other capital
movements
8bps
7bps
Mar 19Other itemsDividend
(77bps)
Cash earnings
(excluding
notable items)
96bps
Notable items
10.63%
4bps
(5bps)
Dividend
reinvestment
plan
(25bps)
Organic
(+27bps)
Other items
(-26bps)
2019 Interim financial results
Review of Group operations
Westpac Group 2019 Interim Financial Results Announcement | 47
The 27 basis point organic capital growth included:
• First Half 2019 cash earnings, excluding notable items (96 basis point increase);
• The 2018 final dividend payment, net of DRP share issuance (69 basis point decrease);
• Ordinary RWA (before FX movements and regulatory measurement changes) fell slightly (contributing to a
7 basis point increase in CET1), mainly driven by reductions in non-credit RWA, with credit RWA slightly higher
over the half; and
• A 7 basis point reduction from other movements, primarily driven by movements in fair value on economic
hedges (3 basis point reduction) and regulatory expected loss in excess of eligible provisions (2 basis point
reduction).
Other items reduced the CET1 capital ratio by 26 basis points. This was primarily driven by the remediation and
restructuring provisions included in notable items (25 basis point reduction).
Additional Tier 1 and Tier 2 capital movement for First Half 2019
During the half, Westpac:
• Issued $1.42 billion of Additional Tier 1 capital (Westpac Capital Notes 6), of which approximately $0.72 billion
comprised reinvestment by the holders of Westpac Capital Notes (net 17 basis points increase);
• Redeemed $0.66 billion of Additional Tier 1 capital (residual Westpac Capital Notes) (16 basis points
decrease); and
• Redeemed $1.0 billion of Tier 2 capital instruments (24 basis points decrease).
Leverage ratio
The leverage ratio represents the amount of Tier 1 capital relative to exposure
1
. At 31 March 2019, Westpac’s
leverage ratio was 5.72%, down 12 basis points since 30 September 2018.
1
As defined under Attachment D of APS110: Capital Adequacy.
2019 Interim financial results
Review of Group operations
48 | Westpac Group 2019 Interim Financial Results Announcement
Internationally comparable capital ratios
The APRA Basel III capital adequacy requirements are more conservative than those of the Basel Committee on
Banking Supervision (BCBS), leading to lower reported capital ratios when compared to international peers. APRA
conducted a study in July 2015 outlining its methodology for measuring international comparable capital ratios. For
details on the adjustments refer to Westpac’s 2019 Interim Investor Discussion Pack.
The table below calculates the Group’s reported capital ratios consistent with this methodology.
As at
As at
As at
% Mov't % Mov't
31 March 30 Sept 31 March Mar 19 - Mar 19 -
2019 2018 2018 Sept 18 Mar 18
Internationally comparable capital ratios
Common equity Tier 1 capital ratio 16.17% 16.14% 16.13% 3bps 4bps
Tier 1 capital ratio 19.07% 19.02% 19.06% 5bps 1bps
Total regulatory capital ratio 21.25% 21.50% 21.68% (25bps) (43bps)
Leverage ratio 6.39% 6.48% 6.39% (9bps) -
2019 Interim financial results
Review of Group operations
Westpac Group 2019 Interim Financial Results Announcement | 49
Risk Weighted Assets (RWA)
As at
As at
As at
% Mov't % Mov't
31 March 30 Sept 31 March Mar 19 - Mar 19 -
$m 2019 2018 2018 Sept 18 Mar 18
Corporate
1
73,551 69,584 71,590 6 3
Business lending
2
35,294 35,417 34,872 - 1
Sovereign
3
1,653 1,644 1,536 1 8
Bank
4
7,066 6,606 6,253 7 13
Residential mortgages 132,133 132,734 129,748 - 2
Australian credit cards 5,910 6,313 6,553 (6) (10)
Other retail 13,082 13,777 14,056 (5) (7)
Small business
5
16,092 16,329 16,017 (1) -
Specialised lending: Property and project finance
6
54,833 57,043 57,239 (4) (4)
Securitisation
7
5,583 5,918 5,869 (6) (5)
Standardised 10,455 10,778 10,639 (3) (2)
Mark-to-market related credit risk 7,110 6,606 7,019 8 1
Credit risk 362,762 362,749 361,391 - -
Market risk 8,338 6,723 7,406 24 13
Operational risk
8
38,641 39,113 30,866 (1) 25
Interest rate risk in the banking book (IRRBB) 7,076 12,989 12,875 (46) (45)
Other 3,002 3,810 3,206 (21) (6)
Total 419,819 425,384 415,744
(1) 1
Total RWA decreased $5.6 billion or 1.3% this half:
• Credit Risk RWA was little changed over the half, with key movements including:
- Adoption of AASB 9 reduced RWA by $3.9 billion. Under the changes, certain defaulted loans (mostly
mortgages) now carry higher accounting impairment provisions and therefore RWA reduced; and
- Regulatory modelling updates for corporates and bank exposures reduced RWA by $1.0 billion.
These were offset by:
- Portfolio growth, which increased RWA by $2.3 billion;
- Foreign currency translation impacts which increased RWA by $2.1 billion from the appreciation of the NZ$;
- Increase in mark-to-market related credit risk RWA of $0.5 billion; and
• Non-credit RWA decreased $5.6 billion or 8.9%. The main driver was a $5.9 billion reduction in interest rate
risk in the banking book driven by lower interest rate risk exposure and an increase in the embedded gain.
1
Corporate – typically includes exposure where the borrower has annual turnover greater than $50 million, and other business
exposures not captured under the definitions of either Business lending or Small Business.
2
Business lending – includes exposures not captured elsewhere where the borrower has annual turnover less than or equal to
$50 million.
3
Sovereign – includes exposures to governments themselves and other non-commercial enterprises that are owned or controlled by
them.
4
Bank – includes exposures to licensed banks and their owned or controlled subsidiaries, and overseas central banks.
5
Small business – program managed business lending exposures.
6
Specialised lending – property and project finance – includes exposures to entities created to finance and / or operates specific assets
where, apart from the income received from the assets being financed, the borrower has little or no independent capacity to repay
from other activities or assets.
7
Securitisation – exposures reflect Westpac’s involvement in activities ranging from originator to investor and include the provision of
securitisation services for clients wishing to access capital markets.
8
Operational risk – the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events,
including legal risk but excluding strategic or reputational risk.
2019 Interim financial results
Review of Group operations
50 | Westpac Group 2019 Interim Financial Results Announcement
Capital adequacy
As at As at As at
31 March 30 Sept 31 March
$m
2019 2018 2018
Tier 1 capital
Common equity Tier 1 capital
Paid up ordinary capital
36,351
36,054 35,168
Treasury shares
(571)
(507) (506)
Equity based remuneration 1,527 1,441 1,414
Foreign currency translation reserve (331) (379) (522)
Accumulated other comprehensive income 15 (11) (14)
Non-controlling interests - other 54 55 50
Retained earnings 26,949 27,883 27,122
Less retained earnings in life and general insurance, funds management and
securitisation entities (1,289) (1,218) (1,238)
Deferred fees 234 258 254
Total common equity Tier 1 capital 62,939
63,576 61,728
Deductions from common equity Tier 1 capital
Goodwill (excluding funds management entities) (8,665) (8,644) (8,656)
Deferred tax assets (1,710) (1,169) (1,116)
Goodwill in life and general insurance, funds management and securitisation entities (941) (942) (1,032)
Capitalised expenditure (1,778) (1,838) (1,867)
Capitalised software (1,881)
(1,792) (1,628)
Investments in subsidiaries not consolidated for regulatory purposes (1,522) (1,567) (1,532)
Regulatory expected loss in excess of eligible provisions (1,148) (1,312) (1,192)
General reserve for credit losses adjustment - (356) (339)
Defined benefit superannuation fund surplus (66) (78) -
Equity investments (482) (570) (680)
Regulatory adjustments to fair value positions (65) (68) (46)
Other Tier 1 deductions (1) (1) (1)
Total deductions from common equity Tier 1 capital (18,259)
(18,337) (18,089)
Total common equity Tier 1 capital after deductions 44,680
45,239 43,639
Additional Tier 1 capital
Basel III complying instruments 9,216 9,144 9,041
Basel III transitional instruments - - 566
Total Additional Tier 1 capital 9,216
9,144 9,607
Net Tier 1 regulatory capital 53,896
54,383 53,246
Tier 2 capital
Basel III complying instruments 7,143 8,025 8,102
Basel III transitional instruments 495 486 473
Eligible general reserve for credit loss 66 54 55
Basel III transitional adjustment - - -
Total Tier 2 capital 7,704
8,565 8,630
Deductions from Tier 2 capital
- -
Investments in subsidiaries not consolidated for regulatory purposes (140) (140) (140)
Holdings of own and other financial institutions Tier 2 capital instruments (103) (93) (83)
Total deductions from Tier 2 capital (243)
(233) (223)
Net Tier 2 regulatory capital 7,461
8,332 8,407
Total regulatory capital 61,357
62,715 61,653
Risk weighted assets 419,819
425,384 415,744
Common equity Tier 1 capital ratio 10.64% 10.63% 10.50%
Additional Tier 1 capital ratio 2.20% 2.15% 2.31%
Tier 1 capital ratio 12.84% 12.78% 12.81%
Tier 2 capital ratio 1.78% 1.96% 2.02%
Total regulatory capital ratio 14.62% 14.74% 14.83%
2019 Interim financial results
Review of Group operations
Westpac Group 2019 Interim Financial Results Announcement | 51
Dividends
% Mov't % Mov't
Half Year Half Year Half Year Mar 19 - Mar 19 -
Ordinary dividend (cents per share) March 19 Sept 18 March 18 Sept 18 Mar 18
Interim (fully franked) 94 - 94 - -
Final (fully franked) - 94 - - -
Total ordinary dividend
94 94 94 - -
Payout ratio (reported) 102.00% 82.77% 76.07% large large
Payout ratio (cash earnings) 98.33% 84.66% 75.28% large large
Adjusted franking credit balance ($m) 1,234 1,357 1,279 (9) (4)
Imputation credit (cents per share - NZ) 7.0 7.0 7.0 - -
The Board has determined an interim fully franked dividend of 94 cents per share, to be paid on 24 June 2019, to
shareholders on the register at the record date of 17 May 2019
1
. The interim dividend represents a payout ratio on
a cash earnings basis of 98.33%. In addition to being fully franked, the dividend will also carry NZ$0.07 in New
Zealand imputation credits that may be used by New Zealand tax residents.
The Board has determined to issue shares to satisfy the DRP for the interim 2019 dividend and to apply a 1.5%
discount to the market price used to determine the number of shares issued under the DRP. The market price
used to determine the number of shares issued under the DRP will be set over the 10 trading days commencing
22 May 2019. The discount to the DRP market price has been applied to give the Group additional capital
flexibility, including for regulatory changes to the measurement of capital and risk weighted assets likely to be
announced in Second Half 2019.
Capital deduction for regulatory expected credit loss
For capital adequacy purposes APRA requires the amount of regulatory expected credit losses in excess of
eligible provisions to be deducted from CET1 capital. The table below shows the calculation of this capital
deduction.
As at As at As at
31 March 30 Sept 31 March
$m
2019 2018 2018
Provisions associated with eligible portfolios
Total provisions for impairment charges (Section 4 Note 10)
3,997 3,053 3,165
plus general reserve for credit losses adjustment
- 356 339
plus provisions associated with partial write-offs
94 101 82
less ineligible provisions
2
(79) (80) (79)
Total eligible provisions 4,012 3,430 3,507
Regulatory expected downturn loss 5,160 4,742 4,699
Shortfall in eligible provisions compared to regulatory expected downturn loss 1,148 1,312 1,192
Common equity Tier 1 capital deduction for regulatory expected downturn loss
in excess of eligible provisions (1,148) (1,312) (1,192)
1
Record date in New York is 16 May 2019.
2
Provisions associated with portfolios subject to the Basel standardised approach to credit risk are not eligible.
2019 Interim financial results
Review of Group operations
52 | Westpac Group 2019 Interim Financial Results Announcement
2.6 Sustainability performance
As one of Australia’s largest companies, Westpac Group plays a role in helping to create positive social, economic
and environmental impact, for the benefit of all. Our approach to sustainability is embedded within the Group’s
business activities and aligns with the priorities set out in the Group’s strategy. We are aligned with the Paris
Climate Agreement and contribute to the United Nations’ Sustainable Development Goals.
In a time of great scrutiny of the financial services sector, it is particularly important that we work in an open and
transparent way to contribute to building a strong banking system that delivers good outcomes for customers and
the economy. Where mistakes are identified we put it right and seek to remediate the situation.
The Royal Commission findings and our own assessments, including our Culture, Governance and Accountability
self-assessment have highlighted a range of areas for change. In response, a number of programs are underway,
focused on:
• Complaints and customer care;
• Non-financial risks: culture, governance and accountability; and
• Product design, performance and remediation.
The actions we are taking are aimed at building a stronger business, helping to restore trust in Australia’s oldest
bank.
Review of Industry Associations
During the First Half 2019 a review of Westpac’s membership of Industry Associations is being conducted, in line
with our Industry Associations principles, with a focus on climate change policy alignment. We have committed to
publicly update stakeholders on the outcomes of this process within six months of the 2018 Annual General
Meeting.
It’s about all of us: 2018-2020 Sustainability Strategy
Westpac Group’s 2018-2020 Sustainability Strategy outlines the Group’s commitment to building a sustainable
future. This includes taking action in the areas where the Group can have the greatest impact and create
sustainable, long-term value for customers, communities and the nation by:
• Helping people make better financial decisions;
• Helping people by being there when it matters most to them; and
• Helping people create a prosperous nation.
Underpinning these three priority areas is a commitment to fostering a culture of care and doing the right thing and
continuing to lead on the sustainability fundamentals – policies, action plans, frameworks and metrics reporting.
We continue to progress on our climate change, human rights and reconciliation action plans.
Westpac is committed to regular reporting to enable a comparison of performance over time. The table below
summarises progress against the goals set out in the Group’s sustainability strategy with a focus on activity in the
past six months.
Performance against sustainability goals
Priority areas Goals Half Year 2019 update
Helping people
make better
financial
decisions
Help more people
better understand
their financial
position, improving
their financial
confidence
Continued to offer a range of products and services, including Westpac SmartPlan,
an online tool to help customers manage their credit card balance and pay down their
debts more eas
ily, and Westpac Life, a flexible savings account that supports
customers’ savings goals;
Continued to help more customers better understand their financial position through
regular contact programs on product features and usage, with 63% of our Consumer
Bank customers contacted during First Half 2019;
Delivered a range of financial literacy programs to individuals, businesses, not-for-
profit organisations and community groups through the Davidson Institute in Australia
and through Managing Your Money program in New Zealand; and
Delivered financial capability communications for different customer segments,
including 850,000 young Australians via Universities and TAFE partnerships, 498,000
women through Ruby Connection and 1.8 million Australians aged 65+ via Starts at
60.
2019 Interim financial results
Review of Group operations
Westpac Group 2019 Interim Financial Results Announcement | 53
Priority areas Goals Half Year 2019 update
Helping people
by being there
when it matters
most to them
Help people recover
from financial
hardship
Helped customers experiencing financial hardship, issuing over 27,000 financial
assistance packages during First Half 2019.
Help people lift out
of a difficult time and
recover stronger
Donated $150,000 to the Salvation Army and a further $100,000 to the Foundation for
Rural & Regional Renewal (FRRR) to support disaster recovery and programs to
build local community resilience;
Provided 496 relief packages for customers impacted by natural disasters across
Australia; and
Delivered a portable 'Bank in a Box' branch to Townsville to help those affected by
floods.
Helping our most
vulnerable
customers
Published the 2020 Customer Vulnerability Action Plan to articulate the Group's
principles for engaging with customers experiencing vulnerability, including providing
specific guidance, help and support for customers experiencing domestic and family
violence and financial abuse;
Launched a Priority Assist 1800 telephone line across our retail brands to support
customers experiencing domestic and family violence and financial abuse;
Established an escalation team that provides dedicated specialist case management
for customers experiencing family violence or financial abuse;
Launched a series of Life Moments campaigns to assist customers and their families
going through challenging circumstances such as ‘loss of a loved one’ or ‘divorce and
separation’, providing practical tools and resources to guide them; and
Established a dedicated customer care team to support Indigenous Australians in
remote communities.
Helping people
creating a
prosperous
nation
Build the workforce
of the future
Continued to provide learning and development offerings as part of our focus on the
future of work to assist employees to develop ‘skills for life’, including piloting a Skills
Mapping Tool to be used to target learning pathways.
Invest and back the
people and ideas
shaping Australia
Awarded $4.2 million in educational scholarships to the next 101 Westpac Scholars,
bringing the cohort to 431 during First Half 2019;
Westpac Foundation job creation grants to social enterprises helped to create 364
jobs
1
for vulnerable Australians;
Supported the establishment of 174 businesses through our Many Rivers partnership.
Since its establishment the partnership has created jobs
1
for 2,087 people, with 763
identifying as Indigenous;
Maintained a portfolio of direct investment in 8 early stage companies; and
Current commitment to Reinventure is $150 million invested in three funds,
supporting Reinventure investment in 27 early stage companies.
Back the growth of
climate change
solutions
Increased committed exposure to climate change solutions taking total committed
exposure to $10.1 billion, above our 2020 target of $10 billion;
Facilitated $2.39 billion
2
in climate change solutions progressing towards our 2020
target of $3 billion; and
Analysed the transition risks to our Australian Business and Institutional lending
3
under a 1.5-degree climate scenario.
Back the growth of
housing affordability
solutions
Increased lending to the social and affordable housing sector to $1.48 billion.
Bring together
partners and
harness the Group’s
capacity to tackle
pressing social
issues that matter
most to the nation
Supported development of the Principles for Responsible Banking under UNEP FI
with 48 other banks. Public consultation is currently being undertaken on the draft
Principles;
Ran a circular economy design sprint with employees, suppliers and customers to
explore ideas to transition waste materials, including single-use plastics, out of the
Westpac Group supply chain; and
In April 2019, joined an Expert Advisory Council through WEConnect International
focusing on best-in-class approaches to supply chain, supplier diversity and access to
capital for women-owned businesses.
1
Jobs created through the Westpac Foundation Social Scale-up grant and Many Rivers which are as at 31 December 2018. Refer to
www.westpac.com.au/sustainability for glossary of terms and metric definitions.
2
Includes climate bond arrangement, issuance, and investment and the Green Tailored Deposit.
3
Australian Business and Institutional lending, excludes retail, sovereign, and bank exposures.
2019 Interim financial results
Review of Group operations
54 | Westpac Group 2019 Interim Financial Results Announcement
Priority areas Goals Half Year 2019 update
A culture that is
caring, inclusive
and innovative
A culture of doing
the right thing
Programs underway to rebuild trust, strengthen governance and deliver more
consistent customer outcomes, including:
- Culture, Governance and Accountability self-assessment action plan;
- Royal Commission response plan;
- Product design, performance and remediation;
- Remuneration and accountability; and
- Customer Care transformation.
Maintained ongoing Navigate training to reinforce Our Compass - a framework which
brings together our vision, service promise, values and Code of Conduct - with
smaller sessions facilitated by team leaders to continue the conversation locally; and
Continued to assess employee performance through the ‘Motivate’ framework – a
behaviours-first approach to people management.
Promote an
inclusive society,
where our workforce
reflects our
customers, and
where more people
feel safe to speak up
Maintained 50% Women in Leadership roles;
Recruited 80 employees who identify as Aboriginal or Torres Strait Islander peoples;
Delivered programs to support inclusive employment opportunities, including our
Tailored Talent neuro-diverse internship program, Equilibrium program supporting
women to move from different sectors into a senior banking opportunity, and the
CareerTrackers Indigenous internship program;
Listed on the Bloomberg Gender-Equality Index;
Workplace Gender Equality Agency (WGEA) Employer of Choice for Gender
Equality; and
73% of employees surveyed during First Half 2019 feel safe to speak up.
Increase channels
where customers
can provide
feedback
Embedded a Customer Outcome Committee to work through complex cases;
62% complaints resolved within five days in First Half 2019 compared to 52% in First
Half 2018;
Launched the “Spot it, Log it and Own it” internal campaign, promoting an improved
culture of complaints handling;
97% of employees completed the “Why Complaints Matter” training; and
Commenced customer round tables around Australia.
Continuing to
lead on the
Sustainability
fundamentals
Employees
Implemented the recommendations of the Sedgwick Review for employees effective
from 1 October 2018, two years ahead of schedule;
Embedded a Group Consequence Management Framework which sets out the
standards expected of our employees and ensures greater consistency and
transparency in the management of employee conduct matters;
Achieved total recordable injury frequency rate of (TRIFR) 2.91 and lost time injury
frequency rate (LTIFR) of 0.37; and
Promoted wellbeing initiatives with focus on mental health, including increasing
awareness through mental health week promotion and development of tools and
resources to support employee wellbeing.
Human rights
Released 2018 UK Slavery and Human Trafficking Statement;
Presented to the Financial Commission on Modern Slavery on Human Trafficking on
the role of the financial sector in addressing modern slavery; and
Initiated preparation for the introduction of reporting to meet the requirements of the
Australian Modern Slavery Act.
Sustainability
lending and
investment
Launched the world’s first Green Tailored Deposit to be certified by internationally
recognized Climate Bonds Initiative (CBI).
Environment
1
Maintained carbon neutrality through the Australian Government Carbon Neutral
Program;
On track to achieve a 4% reduction in GHG emissions compared to Full Year 2018
and 16% compared to Full Year 2016;
Group paper consumption on track to achieve a 5% reduction compared to Full Year
2018 and on track to achieve a 40% reduction in Full Year 2020 since 2016;
Water consumption in all Australian workspaces on track for a 15% reduction by
2020, consuming 192,694 kL in First Half 2019;
Achieved 75% diversion of waste from landfill in Australian offices; and
Committed in April 2019 to source 100% of global electricity consumption through
renewable energy sources by 2025.
Responsible
sourcing
$6.8 million sourced from diverse suppliers, including $2.1 million from Indigenous
suppliers.
Community & social
impact
8.9% of employees have accessed volunteering program as tracked by volunteering
leave and skilled volunteering participation during First Half 2019.
1
Environmental footprint data as at 31 December 2018. Refer to www.westpac.com.au / sustainability for glossary of terms and metric
definitions.
2019 Interim financial results
Review of Group operations
Westpac Group 2019 Interim Financial Results Announcement | 55
2.6.1 Climate-related financial disclosures
The Group has long recognised that climate change is one of the most significant issues that will impact the long-
term prosperity of the economy and way of life. Westpac was the first Australian bank to recognise the importance
of limiting global warming to less than two degrees and that to do this, global emissions need to reach net zero in
the second half of this century.
Westpac continues to integrate the consideration of climate-related risks and opportunities into business
operations. This includes alignment with the recommendations of the Task Force on Climate-related Financial
Disclosures (TCFD), which the Group has publicly committed to support. The Westpac Group’s performance
against the recommendations of the TCFD is summarised below.
Governance
The Board has approved Westpac’s climate change strategy and the Group’s Climate Change Position Statement
and 2020 Action Plan (CCPS). Management of climate change at the Board level is cascaded to Group
Executives.
The Sustainability Council’s membership comprises Group Executive – Customer & Corporate Relations and
General Managers from across the Group. The Council:
• Has explicit responsibility for managing our sustainability agenda including climate change;
• Meets at least quarterly and has climate change as a fixed agenda item;
• Reports to the Board through twice-yearly updates; and
• Has oversight of committees established to oversee aspects of the Group’s CCPS, including the Climate
Change Solutions Committee, Climate Change Risk Committee and Environment Management Committee.
Strategy
The Group’s 2018-2020 Sustainability Strategy and CCPS describe Westpac’s climate change strategy. The
strategy is underpinned by principles which recognise that:
• A transition to a net zero economy is required;
• Economic growth and emissions reductions are complementary goals;
• Addressing climate change creates financial opportunities;
• Climate-related risk is a financial risk; and
• Transparency and disclosure matters.
The CCPS identifies five focus areas where the Group is expected to direct its attention over the short, medium
and long term:
• Provide finance to back climate change solutions;
• Support businesses that manage their climate-related risks;
• Help individual customers respond to climate change;
• Improve and disclose our climate change performance; and
• Advocate for policies that stimulate investment in climate change solutions.
Westpac uses scenario analysis to guide its climate change strategy and to analyse the implications of climate-
related factors to its business. Outcomes against this strategy are communicated in detail on an annual basis.
2019 Interim financial results
Review of Group operations
56 | Westpac Group 2019 Interim Financial Results Announcement
Risk management and scenario analysis
Climate change-related risks are managed within the Group’s sustainability, and wider risk management
framework. The Group examines the policy, legal, technology and market changes related to climate change
(‘transition risks’), and the financial impacts of changes in climate patterns and extreme weather events (‘physical
risks’).
Our CCPS outlines lending standards for the thermal coal mining and energy sectors. These lending parameters
have been included in our Group Risk Appetite Statement and, where appropriate, are applied at the portfolio,
customer and transaction level.
Scenario analysis – summary findings
In First Half 2019, the Group undertook further scenario analysis to assess the resilience of Westpac’s Australian
Business and Institutional lending
1
to transition risks brought about by rapid decarbonisation of the Australian
economy under 1.5 and updated 2-degree
2
scenarios. A summary of findings is provided below:
• 1.5 degrees scenario to 2030: Approximately 2.7% of our Australian Business and Institutional lending is
exposed to sectors that may experience higher risks in a transition to a 1.5-degree economy; and
• 2.0 degrees scenario to 2030: Approximately 0.9% of our Australian Business and Institutional lending is
exposed to sectors that may experience higher risks in a transition to a 2.0-degree economy.
Further details on our scenario analysis will be provided in our full-year reporting and the findings considered as
we update our CCPS in 2020.
Climate-related metrics and targets
Metrics Performance
Support for climate solutions
• Total committed exposure (TCE) to climate solutions
• Facilitation of climate solutions
$10.1 billion versus 2020 target - $10 billion
$2.39 billion versus 2020 target - $3 billion
Energy generation
3
• Emission intensity of power generation portfolio
• Energy mix of electricity generation exposure (WIB
only)
0.28 (tCO
2
e/MWh) versus 2020 target 0.30 (tCO
2
e/MWh)
71% renewable versus 29% non-renewables
Mining and coal exposure
• Lending to all mining (TCE)
• Lending to coal mining (TCE)
• Thermal coal portfolio quality thresholds
0.94% Group total committed exposure
$0.8bn lending to coal mining (metallurgical and thermal)
Coal quality
- Existing projects > 5,700 kCal/kg – Compliant
- New projects > 6,300 kCal/Kg - Compliant
Direct footprint
3
• Total Scope 1, 2, & 3 emissions (tCO
2
e)
• Carbon neutral operations
• Commitment to 100% renewable energy
193,588 tCO
2
e - an annual reduction of 4.4% towards 2020 target of 9%
(2016 baseline)
Carbon neutrality maintained
Committed in April 2019 to source 100% of global electricity consumption
through renewable energy sources by 2025
Climate change portfolio resilience
• Transition risk - 1.5-degree scenario to 2030
• Transition risk - 2-degree scenario to 2030
• Physical risk - 4-degree scenario to 2050
Approximately 2.7% of total business lending exposed to sectors that
may experience higher risk in a transition to a 1.5-degree economy
Approximately 0.9% of total business lending exposed to sectors that
may experience higher risk in a transition to a 2-degree economy
Approximately 1.7% of Australian mortgage portfolio
4
in postcodes which
may be exposed to higher physical risks at 4 degrees of warming
1
Australian Business and Institutional lending, excludes retail, sovereign, and bank exposures.
2
1.5-degree scenario based on the ‘P2’ pathway articulated in the Intergovernmental Panel on Climate Change’s report – Global
Warming of 1.5
O
C. 2-degrees disclosures incorporate multiple scenarios including the IRENA REMap, IEA SDS, IPCC (presented
according to updated methodology), and those described in Westpac’s Sustainability Performance Report, 2016 (p52).
3
As at 30 June 2018.
4
Westpac and St.George.
2019 Interim financial results
Divisional results
Westpac Group 2019 Interim Financial Results Announcement | 57
3.0 Divisional results
Comparative divisional results have been restated. The changes include updates to the methodologies to allocate
certain costs, and recent customer transfers. These changes have no impact on the overall Group’s results or
balance sheet. Refer Section 4, Note 2. During First Half 2019, Westpac adopted AASB 9 and AASB 15.
Comparatives have also been restated for cash earnings for these changes except for expected credit loss
provisioning. Expected credit loss provisioning was not adjusted in comparative periods as it was not feasible.
Notable items
The table below shows the impact of notable items on the divisions in First Half 2019 and Second Half 2018.
Notable items are discussed in Section 1.3.2. These items are discussed further in Note 14 of the 2019 Interim
Financial Report.
First Half 2019
$m
Consumer
Bank
Business
Bank
BT Financial
Group -
Remediation
BT Financial
Group -
Wealth reset
Westpac
New
Zealand
Group
Businesses
Group
Net interest income (47) (161) (4) - - -
(212)
Non-interest income - (13) (587) - - -
(600)
Expenses 31 (14) (101) (190) - -
(274)
Core earnings (16) (188) (692) (190) - -
(1,086)
Impairment charges - - - - - -
-
Tax and non-
controlling interests
14 57 208 54 - -
333
Cash earnings (2) (131) (484) (136) - - (753)
Second Half 2018
$m
Consumer
Bank
Business
Bank
BT Financial
Group -
Remediation
BT Financial
Group -
Wealth reset
Westpac
New
Zealand
Group
Businesses
Group
Net interest income (99) - - - (2) (4)
(105)
Non-interest income (6) - (146) - (11) -
(163)
Expenses (39) (5) (55) - (3) (10)
(112)
Core earnings (144) (5) (201) - (16) (14)
(380)
Impairment charges - - - - - -
-
Tax and non-
controlling interests 34 -
60 - 4 1
99
Cash earnings (110) (5) (141) - (12) (13) (281)
2019 Interim financial results
Divisional results
58 | Westpac Group 2019 Interim Financial Results Announcement
3.1 Consumer Bank
1
Consumer Bank (CB) is responsible for sales and service to consumer customers in Australia under the Westpac,
St.George, BankSA, Bank of Melbourne and RAMS brands. Activities are conducted through a dedicated team of
specialist consumer relationship managers along with an extensive network of branches, call centres and ATMs.
Customers are also supported by a range of internet and mobile banking solutions. CB works in an integrated way
with Business Bank, BTFG and WIB in the sales and service of certain financial services and products including
wealth and foreign exchange. The revenue from these products is mostly retained by the product originators.
% Mov't % Mov't
Half Year Half Year Half Year Mar 19 - Mar 19 -
$m March 19 Sept 18 March 18 Sept 18 Mar 18
Net interest income 3,882 3,760 4,089 3 (5)
Non-interest income 359 392 370 (8) (3)
Net operating income 4,241 4,152 4,459 2 (5)
Operating expenses (1,821) (1,883) (1,766) (3) 3
Core earnings 2,420 2,269 2,693
7 (10)
Impairment charges (268) (236) (250) 14 7
Operating profit before tax 2,152 2,033 2,443
6 (12)
Tax and non-controlling interests (638) (620) (734) 3 (13)
Cash earnings 1,514 1,413 1,709
7 (11)
Add back notable items 2 110 - (98) -
Cash earnings excluding notable items 1,516 1,523 1,709
- (11)
Economic profit 938 822 1,255 14 (25)
Expense to income ratio 42.94% 45.35% 39.61% (241bps) 333bps
Net interest margin 2.20% 2.14% 2.40% 6bps (20bps)
As at As at As at
% Mov't % Mov't
31 March 30 Sept 31 March Mar 19 - Mar 19 -
$bn 2019 2018 2018 Sept 18 Mar 18
Deposits
Term deposits 65.3 63.9 58.1 2 12
Other 140.5 142.3 141.3 (1) (1)
Total deposits 205.8 206.2 199.4
- 3
Net loans
Mortgages 375.4 373.0 366.0 1 3
Other 13.2 13.3 13.6 (1) (3)
Provisions (1.5) (0.9) (0.9) 67 67
Total net loans 387.1 385.4 378.7
- 2
Deposit to loan ratio 53.16% 53.50% 52.65% (34bps) 51bps
Total assets 394.5 392.5 386.0
1 2
TCE 454.3 452.7 445.7 - 2
Average interest-earning assets
2
353.1 350.3 342.2 1 3
As at As at As at
31 March 30 Sept 31 March
2019 2018 2018
Credit quality
Loan impairment charges to average loans annualised
2
0.14% 0.12% 0.13%
Mortgage 90+ day delinquencies 0.84% 0.74% 0.72%
Other consumer loans 90+ day delinquencies 1.66% 1.50% 1.61%
Total stressed exposures to TCE 0.74%
0.65% 0.64%
1
The Group has adopted AASB 9 Financial Instruments and AASB 15 Revenue from Contracts with Customers from 1 October 2018.
Statutory comparatives have not been restated. Refer to Note 1 in Section 4 for further detail. However, where applicable, cash
earnings comparatives (excluding expected credit loss provisioning) have been restated to aid comparability. Refer to the Cash
earnings policy in Section 1.3.4 for further detail. In addition, during First Half 2019, the Group has made a number of presentational
changes to the Balance Sheet and Income Statement. Both statutory and cash earnings comparatives have been restated. Refer to
Note 1 in Section 4 for further detail.
2
Averages are based on a six month period.
2019 Interim financial results
Divisional results
Westpac Group 2019 Interim Financial Results Announcement | 59
Financial performance
First Half 2019 - Second Half 2018
Cash earnings of $1,514 million were $101 million or 7% higher than Second Half 2018, as provisions for
estimated customer refunds, costs and payments (notable items) reduced by $108 million. Excluding notable
items, cash earnings were flat (down $7 million), as a rise in net interest income was offset by an increase in
impairment charges.
Net interest
income up
$122m, 3%
Net loans were up $1.7 billion with all the growth in mortgages which increased $2.4 billion,
or 1%. This increase was partly offset by lower personal lending. Given the low growth
environment the division has focused on returns over growth and this has contributed to
mortgages growing less than system at 0.5 times
1
;
Deposits were little changed over the half, with a 2% increase in term deposits and a 1% rise
in transaction accounts (including offset accounts) offset by a reduction in online savings
accounts; and
Net interest margin was 6 basis points higher as notable items were lower and deposit
spreads increased from repricing online deposits and term deposits. Benefit from the full
period impact of mortgage repricing (9 basis points), was mostly offset by competition,
retention pricing, and mix changes as customers switched to principal and interest loans from
interest only lending (7 basis points). Margins were also impacted (down 1 basis point) by
regulatory changes to how credit card interest is calculated (effective 1 January 2019).
Non-interest
income
down $33m,
8%
Lower foreign currency conversion fees;
Lower product related fees from a reduction in new mortgages and personal lending and a
decline in credit cards fee income; and
These declines were partially offset by lower notable items ($6 million).
Expenses
down $62m,
3%
Reversal of a $31 million notable item raised in Second Half 2018 as the settlement was not
approved by the Courts, contributed $62 million to the decline in expenses;
Structural productivity gains of $47 million from further use of digital channels (self-serve and
e-statements), rationalisation of 37 branches and 329 ATMs and a 422 reduction in FTE; and
These declines were partly offset by annual salary reviews and inflation increases, the
launch of a new advertising campaign, higher investment related costs including for the
customer service hub, and costs associated with reducing the size of the branch and ATM
network.
Impairment
charges up
$32m, 14%
Credit quality remains sound, with stressed exposures to TCE at 0.74%;
Mortgage 90+ day delinquencies remained low at 0.84% but were higher (up 10 basis points)
as the easing in economic conditions led to a small rise of customers in hardship and an
increase in the time taken to sell a property. This led to facilities remaining delinquent for
longer periods. Other consumer 90+ day delinquencies were up 16 basis points reflecting
seasonal trends and from an operational issue in collections; and
Impairment charges were higher driven by the rise in consumer delinquencies. Under AASB
9, changes in consumer delinquencies have a larger im
pact on provisions and hence
impairment charges.
Economic
profit up
$116m, 14%
Allocated capital was little changed over the half consistent with the low balance sheet
growth. As a result the 7% increase in cash earnings translated to a 14% increase in
economic profit.
1
Source: RBA, March 2019.
2019 Interim financial results
Divisional results
60 | Westpac Group 2019 Interim Financial Results Announcement
First Half 2019 - First Half 2018
Cash earnings were 11% lower from a 20 basis point decline in net interest margin, and increased expenses, from
a rise in regulatory and compliance costs and higher investment and technology related costs.
Net interest
income
down $207m,
5%
Lending increased 2% with all the growth in mortgages, partly offset by a decline in other
personal lending. Mortgage growth was below system as the division prioritised return over
growth. The decline in personal lending was due to a 3% reduction in cards and lower
personal loans;
A 12% increase in term deposits, and a 3% rise in transaction accounts supported the 3%
rise in deposits; and
Net interest margin was down 20 basis points. The decline was due to $47 million of notable
items, higher short term wholesale funding costs, and lower mortgage spreads from
increased competition and changes in mortgage mix with less interest only lending. The
decline was partly offset by higher deposit spreads.
Non-interest
income down
$11m, 3%
The decline was mostly due to lower foreign currency related fees; and
Lower product fee income from fee simplification (some reduction and standardisation of fees
across certain accounts) while some fees were also eliminated, and reduced transaction
volumes.
Expenses
up $55m, 3%
Most of the increase was due to higher investment and technology related costs (up $18
million), an increase in regulatory and compliance costs (up $12 million), costs related to
closing branches and removing ATMs $24 million, and the launch of a new advertising
campaign;
Other cost increases related to annual salary increases and inflationary rises were offset by:
- Reversal of a notable item raised in Second Half 2018 ($31 million); and
- Structural productivity benefits from increasing customer self-service, higher take-up of e-
statements and from optimising the network including the full period benefit of the 40
branches closed in 2018.
Impairment
charges up
$18m, 7%
Credit quality remains sound, with stressed exposures to TCE at 0.74%;
Mortgage 90+ day delinquencies were up 12 basis points to 0.84% while other consumer
90+ day delinquencies were up 5 basis points, partly from an operational issue in collections;
and
Impairment charges were higher driven by the rise in consumer delinquencies.
Economic
profit down
$317m, 25%
The percentage reduction in economic profit was more than the cash earnings decline as
more capital was allocated to the division following implementation of new risk weighted
asset models for mortgages.
2019 Interim financial results
Divisional results
Westpac Group 2019 Interim Financial Results Announcement | 61
3.2 Business Bank
1
Business Bank (BB) is responsible for sales and service to SME and commercial business customers in Australia
for facilities up to approximately $150 million. The division operates under the Westpac, St.George, BankSA and
Bank of Melbourne brands. Customers are provided with a wide range of banking and financial products and
services to support their borrowing, payments and transaction needs. In addition, specialist services are provided
for cash flow finance, trade finance, automotive and equipment finance and property finance. The division is also
responsible for consumer customers with auto finance loans. BB works in an integrated way with BTFG and WIB
in the sales referral and service of certain financial services and products including corporate superannuation,
foreign exchange and interest rate hedging. The revenue from these products is mostly retained by the product
originator.
% Mov't % Mov't
Half Year Half Year Half Year Mar 19 - Mar 19 -
$m March 19 Sept 18 March 18 Sept 18 Mar 18
Net interest income
2,223 2,362 2,328 (6) (5)
Non-interest income
287 315 311 (9) (8)
Net operating income
2,510 2,677 2,639 (6) (5)
Operating expenses
(988) (967) (948) 2 4
Core earnings
1,522 1,710
1,691
(11) (10)
Impairment charges
(75) (164) (148) (54) (49)
Operating profit before tax
1,447 1,546
1,543
(6) (6)
Tax and non-controlling interests
(434) (466) (463) (7) (6)
Cash earnings 1,013 1,080 1,080
(6) (6)
Add back notable items 131 5 - large -
Cash earnings excluding notable items 1,144 1,085 1,080
5 6
Economic profit
644 711 717 (9) (10)
Expense to income ratio
39.36% 36.12% 35.92% 324bps 344bps
Net interest margin
3.02% 3.17% 3.19% (15bps) (17bps)
As at As at
As at
% Mov't % Mov't
31 March 30 Sept 31 March Mar 19 - Mar 19 -
$bn 2019 2018 2018 Sept 18 Mar 18
Deposits
Term deposits
45.9 46.8 45.0 (2) 2
Other
63.2 63.9 63.1 (1) -
Total deposits
109.1 110.7
108.1
(1) 1
Net loans
Mortgages
54.8 54.9 54.7 - -
Business
89.8 90.5 89.3 (1) 1
Other
8.0 8.3 8.6 (4) (7)
Provisions
(1.4) (1.1) (1.1) 27 27
Total net loans
151.2 152.6
151.5
(1) -
Deposit to loan ratio
72.16% 72.54% 71.35% (38bps) 81bps
Total assets
155.1 156.4
154.7
(1) -
TCE
190.3 191.8 192.2 (1) (1)
Average interest-earning assets
2
147.8 148.4 146.3 - 1
As at As at As at
31 March 30 Sept 31 March
2019 2018 2018
Credit quality
Loan impairment charges to average loans annualised
2
0.10% 0.21% 0.20%
Mortgage 90+ day delinquencies
0.82% 0.73% 0.66%
Other consumer loans 90+ day delinquencies
2.21% 2.11% 1.90%
Business: impaired exposures to TCE
0.60% 0.55% 0.55%
Total stressed exposures to TCE
2.74%
2.79% 2.56%
1
The Group has adopted AASB 9 Financial Instruments and AASB 15 Revenue from Contracts with Customers from 1 October 2018.
Statutory comparatives have not been restated. Refer to Note 1 in Section 4 for further detail. However, where applicable, cash
earnings comparatives (excluding expected credit loss provisioning) have been restated to aid comparability. Refer to the Cash
earnings policy in Section 1.3.4 for further detail. In addition, during First Half 2019, the Group has made a number of presentational
changes to the Balance Sheet and Income Statement. Both statutory and cash earnings comparatives have been restated. Refer to
Note 1 in Section 4 for further detail.
2
Averages are based on a six month period.
2019 Interim financial results
Divisional results
62 | Westpac Group 2019 Interim Financial Results Announcement
Financial performance
First Half 2019 - Second Half 2018
Cash earnings of $1,013 million was $67 million (or 6%) lower than Second Half 2018 with performance impacted
by notable items, which included an increase in provisions for estimated customer refunds, payments and
associated costs ($126 million, after tax). Excluding notable items, cash earnings were $59 million or 5% higher
from disciplined margin management while solid asset quality contributed to a 54% reduction in impairment
charges.
Net interest
income down
$139m, 6%
Loans were $1.4 billion lower (down 1%). New lending was down from reduced demand
across industries, and from the division’s continued focus on risk adjusted returns. Auto
finance lending was lower while mortgage lending was little changed, consistent with the
slowdown in system investment property lending;
Deposits were 1% lower, consistent with the decline in loan demand. The fall was across at
call and term products; and
Net interest margin was 15 basis points lower, due to notable items ($161 million) which
reduced margins by 22 basis points. Excluding notable items, margins were 7 basis points
higher from the repricing of mortgages and business lending and from improved deposit
spreads.
Non-interest
income down
$28m, 9%
Decrease was due to
- $13 million of notable items;
- Lower loan fees consistent with the decline in new lending; and
- A reduction in merchant income from lower scheme fees and interchange repricing.
Expenses
up $21m, 2%
Higher costs associated with notable items ($9 million); and
Increased regulatory and compliance spending, including costs associated with simplifying
loan documentation and changing Auto finance commission structures.
Ordinary cost increases were largely offset by productivity including:
- FTE reducing 2% from organisational redesign, centralising banker support and creating
dedicated SME teams; and
- Introduction of a new banker toolkit which provides integrated diary management,
compliance and regulatory alerts, and improved access to customer information.
Impairment
charges down
$89m, 54%
Credit quality was solid with stressed exposures to TCE declining 5 basis points to 2.74%;
Auto delinquencies were higher, mostly due to the 4% decline in the portfolio; and
Impairment charges were lower, mostly from a decrease in stressed commercial facilities and
lower individual provisions, partially offset by higher Auto delinquencies.
Economic
profit down
$67m, 9%
Excluding notable items, economic profit increased $99 million, or 14%, reflecting the 5%
increase in cash earnings excluding notable items and a 3% reduction in allocated capital.
The capital reduction was driven by management of unutilised limits and reduced lending.
2019 Interim financial results
Divisional results
Westpac Group 2019 Interim Financial Results Announcement | 63
First Half 2019 - First Half 2018
Cash earnings of $1,013 million was $67 million (or 6%) lower than First Half 2018 with performance impacted by
notable items, which included provisions for estimated customer refunds, payments and associated costs
($131 million after tax). Excluding notable items, cash earnings were $64 million or 6% higher from disciplined
margin management and a 49% reduction in impairment charges.
Net interest
income down
$105m, 5%
Lending was flat, with growth in business lending more than offset by an 8% decline in Auto
finance lending. New lending slowed through the year as both property and SME demand
eased;
Deposits increased 1% supported by a 4% increase in transaction balances and a 2% rise in
term deposits; and
Net interest margin declined 17 basis points, due to notable items ($161 million) reducing
margins by 22 basis points. Excluding this impact the net interest margin was up 5 basis
points from loan repricing and higher deposits spreads.
Non-interest
income down
$24m, 8%
Decrease was mostly due to:
- $13 million of notable items; and
- Lower loan fees from a reduction in new lending.
Expenses up
$40m, 4%
Notable items increased expenses by $14 million;
Higher investment, and regulatory and compliance costs; and
Increases from other costs were largely offset by productivity benefits including changing
banking support structures and introducing specialised teams to support SME customers.
Impairment
charges down
$73m, 49%
The level of stressed exposures to TCE increased 18 basis points to 2.74% from 2.56%.
The increase was driven by higher mortgage and Auto finance delinquencies. The rise in
Auto delinquencies was mostly due to an operational issue in collections and from the 8%
decline in the Auto portfolio; and
Impairment charges were lower mostly from a decrease in stressed commercial facilities and
lower individual provisions, partially offset by higher auto delinquencies.
Economic
profit down
$73m, 10%
Excluding notable items, economic profit increased 14%, with cash earnings up 6% and
capital allocated 2% lower, from management of unutilised limits.
2019 Interim financial results
Divisional results
64 | Westpac Group 2019 Interim Financial Results Announcement
3.3 BT Financial Group (Australia)
1
BT Financial Group (Australia) (BTFG) is the Australian wealth management and insurance arm of the Westpac
Group providing a broad range of associated services. BTFG’s funds management operations include the
manufacturing and distribution of investment, superannuation and retirement products, wealth administration
platforms, private wealth, margin lending and equities broking. BTFG’s insurance business covers the
manufacturing and distribution of life, general and lenders mortgage insurance. The division also uses a third party
to manufacture certain general insurance products. In managing risk across all insurance classes the division
reinsures certain risks using external providers. In addition to the BT brand, BTFG operates a range of financial
service brands along with the banking brands of Westpac, St.George, Bank of Melbourne and BankSA for Private
Wealth and Insurance.
On 19 March 2019, the Group announced changes to the way it supports customers’ wealth and insurance needs,
realigning its major BTFG businesses into expanded Consumer and Business divisions and exiting the provision of
personal financial advice. Changes to the Group’s organisational structure were effective from 1 April 2019.
Consequently this will be the last time BTFG will be reported as a standalone division.
% Mov't % Mov't
Half Year Half Year Half Year Mar 19 - Mar 19 -
$m March 19 Sept 18 March 18 Sept 18 Mar 18
Net interest income 297 302 294 (2) 1
Non-interest income 142 735 881 (81) (84)
Net operating income 439 1,037 1,175 (58) (63)
Operating expenses (872) (682) (590) 28 48
Core earnings (433) 355
585
large large
Impairment benefits/ (charges) 1 (4) (4) large large
Operating profit before tax (432) 351
581
large large
Tax and non-controlling interests 127 (110) (175) large large
Cash earnings (305) 241 406 large large
Add back notable items
Wealth restructuring 136 - - - -
Provisions for estimated customer refunds, payments and costs 484 141 - large -
Cash earnings (excluding notable items) 315 382
406
(18) (22)
Economic profit (586) 117 335 large large
Expense to income ratio 198.63% 65.77% 50.21% large large
Income on invested capital
2
29 33 25 (12) 16
The following table shows cash earnings excluding notable items of the business within BTFG.
Cash earnings excluding notable items
% Mov't % Mov't
Half Year Half Year Half Year Mar 19 - Mar 19 -
$m March 19 Sept 18 March 18 Sept 18 Mar 18
Funds Management business (excluding Advice) 236 238 281 (1) (16)
Insurance 87 149 133 (42) (35)
Capital and other 21 22 18 (5) 17
Advice (29) (27) (26) 7 12
Total cash earnings excluding notable items 315 382
406
(18) (22)
As at As at
As at
% Mov't % Mov't
31 March 30 Sept 31 March Mar 19 - Mar 19 -
$bn 2019 2018 2018 Sept 18 Mar 18
Deposits 33.5 33.0 31.7 2 6
Net loans
Loans 21.1 21.0 20.8 - 1
Provisions - - - - -
Total net loans 21.1 21.0
20.8
- 1
Deposit to loan ratio 158.77% 157.14% 152.40% 163bps large
Total funds 203.1 205.6 197.7 (1) 3
Average funds
3
197.3 205.2 198.2 (4) -
1
The Group has adopted AASB 9 Financial Instruments and AASB 15 Revenue from Contracts with Customers from 1 October 2018.
Statutory comparatives have not been restated. Refer to Note 1 in Section 4 for further detail. However, where applicable, cash
earnings comparatives (excluding expected credit loss provisioning) have been restated to aid comparability. Refer to the Cash
earnings policy in Section 1.3.4 for further detail. In addition, during First Half 2019, the Group has made a number of presentational
changes to the Balance Sheet and Income Statement. Both statutory and cash earnings comparatives have been restated. Refer to
Note 1 in Section 4 for further detail.
2
Income on Invested Capital represents revenue generated from investing BTFG’s capital balances (required for regulatory purposes).
3
Averages are based on a six month period.
2019 Interim financial results
Divisional results
Westpac Group 2019 Interim Financial Results Announcement | 65
Financial performance
First Half 2019 - Second Half 2018
In First Half 2019 BTFG reported a loss of $305 million with the result impacted by notable items, which reduced
cash earnings by $620 million. Notable items include provisions for estimated customer refunds, payments and
associated costs of $484 million (after tax), and provisions for the restructuring of the Wealth business of
$136 million after tax). Excluding these notable items, cash earnings were $315 million, down 18% (or $67 million)
compared to Second Half 2018. This was primarily due to higher weather related general insurance claims and
margin compression related to the cessation of grandfathered commission payments and platforms repricing.
Net interest
income down
$5m, 2%
Loans were little changed over the half, as investment lending slowed and the division
maintained its focus on returns. Deposits were up 2%, mostly in term deposits;
Net interest margin was down 1 basis point with the decline due to notable items. This was
partly offset by higher mortgage and deposit spreads from repricing.
Non-interest
income down
$593m, 81%
Wealth Management contribution was down $502 million, mostly from an increase in notable
items ($447 million). Excluding notable items, the wealth management contribution was down
$55 million (or 10%) from:
- The cessation of grandfathered commission payments ($21 million);
- A reduction in Advice income of $19 million;
- Lower funds income (down $16 million) from a 4% reduction in average funds under
administration from weaker markets and outflows from legacy platforms, partially offset by
a 38% increase in funds on Panorama to $17 billion;
- Lower platform margins from full period impact of repricing and product mix changes ($8
million); and
- Partly offset by the non-repeat of negative returns in boutique funds in Second Half 2018
($11 million).
Insurance income was $90 million (or 33%) lower. Excluding notable items ($6 million in
Second Half 2018) insurance income was down $96 million:
- General insurance was $94 million lower mostly from an increase in claims associated with
major weather events (Townsville flood, Sydney hailstorms, and large NSW/ QLD storms);
- Life insurance up $2 million supported by lower claims and improved lapses; and
- LMI contribution was $4 million lower, from reduced income from a reduction in higher LVR
lending and higher claims.
The contribution from capital and other was $1 million down mostly due to a lower investment
contribution.
Expenses up
$190m, 28%
Notable items increased expenses by $236 million including: provisions for costs associated
with the reset of Westpac’s wealth strategy ($190 million), and estimated costs of processing
customer refunds and payments ($46 million); and
Partly offset by seasonally lower expenses (expenses are typically higher in the second half
of the year from end of financial year activities), and productivity benefits from organisational
redesign, product simplification and contract renegotiations.
Economic
profit down
$703m
The decline in economic profit is consistent with decline in cash earnings.
2019 Interim financial results
Divisional results
66 | Westpac Group 2019 Interim Financial Results Announcement
First Half 2019 - First Half 2018
First Half 2019 cash earnings were a loss of $305 million. Excluding the impact of notable items, cash earnings
were $315 million, down 22% (or $91 million). This was primarily due to higher weather related insurance claims
and margin compression related to the cessation of grandfathered commission payments and platforms repricing.
Net interest
income up
$3m, 1%
Loans up 1% mostly in mortgages, while most deposit growth was in term deposits; and
Net interest margin was down 4 basis points from higher funding costs and provisions for
estimated customer refunds. This was partly offset by higher mortgage and deposit spreads.
Non-interest
income down
$739m, 84%
Wealth Management contribution was down $682 million, mostly from an increase in notable
items of $587 million. Excluding these items, the wealth management contribution was down
$95 million (or 15%) from:
- Lower Advice revenue mostly from lower activity and a reduction in the number of advisors
($29 million);
- Margin compression ($25 million) driven by platform repricing and product mix changes;
- Lower revenue from the cessation of grandfathered commission payments ($21 million);
- First Half 2018 included $9 million from boutique funds, which were sold in Second Half
2018; and
- Revenue $8 million lower from a reduction in average funds under administration from
weaker markets and outflows on legacy platforms. Legacy platform outflows were partly
offset by an $8 billion increase in funds on the Panorama platform.
Insurance income was $64 million (or 26%) lower:
- General insurance was $60 million lower mostly from higher claims for major weather
events. In First Half 2019 major weather claims were $89 million, compared to $23 million
in First Half 2018. This was partly offset by lower working claims;
- Life insurance contribution up $3 million supported by higher premiums for Group Life
(reflecting the full period impact), partly offset by higher claims; and
- LMI contribution was $7 million lower, from reduced income from lower volumes of higher
LVR lending.
The contribution from capital and other was up $7 million mostly due to a higher investment
contribution.
Expenses up
$282m, 48%
Expenses included notable items of $291 million; and
Excluding these items expenses were $9 million lower due to productivity benefits from
organisational redesign, product simplification and contract renegotiation.
Economic
profit down
$921m
The decline in economic profit is consistent with decline in cash earnings.
2019 Interim financial results
Divisional results
Westpac Group 2019 Interim Financial Results Announcement | 67
3.3.1 Funds Management business
(including Financial Planning and Advice)
% Mov't % Mov't
Half Year Half Year Half Year Mar 19 - Mar 19 -
$m March 19 Sept 18 March 18 Sept 18 Mar 18
Net interest income 293 300 290 (2) 1
Non-interest income (68) 434 614 large large
Net operating income 225 734 904 (69) (75)
Operating expenses (812) (619) (533) 31 52
Core earnings (587) 115 371
large
large
Impairment benefits / (charges) 1 (4) (5) large large
Operating profit before tax (586) 111 366
large
large
Tax and non-controlling interests 173 (37) (111) large large
Cash earnings (413) 74 255
large
large
Expense to income ratio 360.89% 84.33% 58.96% large large
Movement of Group Funds
As at
As at
As at
% Mov't % Mov't
31 March
Net Other 30 Sept 31 March
Mar 19 - Mar 19 -
$bn 2019 Inflows Outflows Flows Mov't
1
2018 2018
Sept 18 Mar 18
Superannuation 38.9 1.8 (2.0) (0.2) (0.2) 39.3 37.4 (1) 4
Platforms 120.8 15.5 (17.3) (1.8) (0.3) 122.9 118.6 (2) 2
Packaged funds
2
39.8 3.0 (2.9) 0.1 0.1 39.6 38.0 1 5
Other
3
3.6 - - - (0.2) 3.8 3.7 (5) (3)
Total funds 203.1
20.3
(22.2)
(1.9)
(0.6) 205.6 197.7
(1) 3
Market share in key Australian wealth products are displayed below.
Current Australian market share
4
Market
Product share Rank
Platforms (includes Wrap and Corporate Super) 18.1% 1
Retail (excludes Cash) 17.2% 1
Corporate Super 12.5% 3
1
Other movement includes market movement and other client transactions including fund transfers, account fees and distributions.
2
Packaged funds include Advance and Management Accounts.
3
Other includes capital reserves.
4
Market share is based on published market share statistics from Strategic Insight as at 31 December 2018 and represents the
addition of St.George Wealth and BT Wealth business market share at this time.
2019 Interim financial results
Divisional results
68 | Westpac Group 2019 Interim Financial Results Announcement
3.3.2 Insurance business
The Insurance business result includes the Westpac and St.George Life Insurance, General Insurance and
Lenders Mortgage Insurance (LMI) businesses.
% Mov't % Mov't
Half Year
Half Year Half Year Mar 19 - Mar 19 -
$m
March 19
Sept 18 March 18 Sept 18 Mar 18
Net interest income
3
2 3 50 -
Non-interest income
179
269 243 (33) (26)
Net operating income
182
271 246 (33) (26)
Operating expenses
(58)
(60) (55) (3) 5
Core earnings
124
211
191
(41) (35)
Impairment benefits / (charges)
-
- - - -
Operating profit before tax
124
211
191
(41) (35)
Tax and non-controlling interests
(37)
(66) (58) (44) (36)
Cash earnings
87
145
133
(40) (35)
Expense to income ratio
31.87%
22.14% 22.36% large large
Cash earnings
% Mov't % Mov't
Half Year
Half Year Half Year Mar 19 - Mar 19 -
$m
March 19
Sept 18 March 18 Sept 18 Mar 18
Life Insurance
77
71 75 8 3
General Insurance
-
62 43 (100) (100)
Lenders Mortgage Insurance
10
12 15 (17) (33)
Total cash earnings
87
145
133
(40) (35)
Insurance key metrics
Life Insurance in-force premiums
% Mov't % Mov't
Half Year
Half Year Half Year Mar 19 - Mar 19 -
$m
March 19
Sept 18 March 18 Sept 18 Mar 18
Life Insurance in-force premiums at start of period
1,277 1,276 1,068 - 20
Sales / New Business
1
55 80 283 (31) (81)
Lapses
(73)
(79) (75) (8) (3)
Life Insurance in-force premiums at end of period
2
1,259 1,277
1,276
(1) (1)
Claims ratios
3
for Insurance Business
% Mov't % Mov't
Half Year
Half Year Half Year Mar 19 - Mar 19 -
(%)
March 19
Sept 18 March 18 Sept 18 Mar 18
Life Insurance
48 42 44
14
9
General Insurance
81 37 54
119
50
Lenders Mortgage Insurance
25 11 20
127
25
Gross written premiums
% Mov't % Mov't
Half Year
Half Year Half Year Mar 19 - Mar 19 -
$m
March 19
Sept 18 March 18 Sept 18 Mar 18
General Insurance gross written premium
259
252 251 3 3
Lenders Mortgage Insurance gross written premium
4
76
90 90 (16) (16)
1
Sales/New Business in First Half 2018 includes $203 million from Group Life Insurance for BTFG Corporate Super.
2
The life insurance in-force premium at end of First Half 2019 consists of $979 million retail and $280 million Group Life Insurance
(Second Half 2018: $994 million retail, $283 million Group Life Insurance; First Half 2018: $1 billion retail, $276 million Group Life
Insurance).
3
Claims ratios are claims over earned premium plus reinsurance rebate. The lenders mortgage insurance claims ratios have been
calculated to include exchange commission.
4
LMI gross written premium includes loans >90% LVR reinsured with Arch Reinsurance Limited. First Half 2019 gross written premium
includes $52 million from the arrangement (Second Half 2018: $61 million, First Half 2018: $62 million).
2019 Interim financial results
Divisional results
Westpac Group 2019 Interim Financial Results Announcement | 69
3.4 Westpac Institutional Bank
1
Westpac Institutional Bank (WIB) delivers a broad range of financial products and services to commercial,
corporate, institutional and government customers with connections to Australia and New Zealand. WIB operates
through dedicated industry relationship and specialist product teams, with expert knowledge in financing,
transactional banking, and financial and debt capital markets. Customers are supported throughout Australia as
well as via branches and subsidiaries located in New Zealand, the US, UK and Asia. WIB is also responsible for
Westpac Pacific currently providing a range of banking services in Fiji and PNG. WIB works in an integrated way
with all the Group’s divisions in the provision of more complex financial needs including across foreign exchange
and fixed interest solutions.
% Mov't % Mov't
Half Year Half Year Half Year Mar 19 - Mar 19 -
$m March 19 Sept 18 March 18 Sept 18 Mar 18
Net interest income 743 754 688 (1) 8
Non-interest income 682 812 753 (16) (9)
Net operating income 1,425 1,566 1,441 (9) (1)
Operating expenses (654) (771) (678) (15) (4)
Core earnings 771 795
763
(3) 1
Impairment benefits / (charges) (15) 9 6 large large
Operating profit before tax 756 804
769
(6) (2)
Tax and non-controlling interests (213) (266) (215) (20) (1)
Cash earnings 543 538
554
1 (2)
Economic profit 253 259 227 (2) 11
Expense to income ratio 45.89% 49.23% 47.05% (334bps) (116bps)
Net interest margin 1.67% 1.74% 1.60% (7bps) 7bps
As at As at
As at
% Mov't % Mov't
31 March 30 Sept 31 March Mar 19 - Mar 19 -
$bn 2019 2018 2018 Sept 18 Mar 18
Deposits 95.7 104.9 99.0 (9) (3)
Net loans
Loans 76.7 77.7 76.6 (1) -
Provisions (0.2) (0.3) (0.3) (33) (33)
Total net loans 76.5 77.4
76.3
(1) -
Deposit to loan ratio 125.10% 135.53% 129.75% large large
Total assets 99.8 102.5 105.0 (3) (5)
TCE 176.4 173.2 167.5 2 5
Average interest-earning assets
2
89.1 86.3 86.4 3 3
Loan impairment charges/(benefits) to average loans annualised 0.04% (0.02%) (0.02%) large large
Impaired exposures to TCE 0.08% 0.03% 0.06% 5bps 2bps
Total stressed exposures to TCE 0.63% 0.66% 0.78% (3bps) (15bps)
Total funds - - 6.6 - (100)
Revenue contribution
% Mov't % Mov't
Half Year Half Year Half Year Mar 19 - Mar 19 -
$m March 19 Sept 18 March 18 Sept 18 Mar 18
Lending and deposit revenue 848 862 807 (2) 5
Markets, sales and fee income 458 439 451 4 2
Total customer revenue 1,306 1,301
1,258
- 4
Derivative valuation adjustments (11) 14 - large -
Trading revenue 126 60 161 110 (22)
Hastings - 180 23 (100) (100)
Other
3
4 11 (1) (64) large
Total WIB revenue 1,425 1,566
1,441
(9) (1)
1
The Group has adopted AASB 9 Financial Instruments and AASB 15 Revenue from Contracts with Customers from 1 October 2018.
Statutory comparatives have not been restated. Refer to Note 1 in Section 4 for further detail. However, where applicable, cash
earnings comparatives (excluding expected credit loss provisioning) have been restated to aid comparability. Refer to the Cash
earnings policy in Section 1.3.4 for further detail. In addition, during First Half 2019, the Group has made a number of presentational
changes to the Balance Sheet and Income Statement. Both statutory and cash earnings comparatives have been restated. Refer to
Note 1 in Section 4 for further detail.
2
Averages are based on a six month period.
3
Includes capital benefit and the Bank Levy.
2019 Interim financial results
Divisional results
70 | Westpac Group 2019 Interim Financial Results Announcement
Financial performance
First Half 2019 - Second Half 2018
Cash earnings of $543 million were $5 million, or 1%, higher than Second Half 2018, mostly driven by higher
financial markets income. These gains were partly offset by a 7 basis point decline in net interest margin, no
contribution from Hastings, and a $15 million impairment charge compared to a $9 million impairment benefit in
Second Half 2018.
Net interest
income down
$11m, 1%
• Net loans down 1%, mostly from reduced utilisation of warehouse facilities as loans were
securitised out of the warehouse. Lending was also lower reflecting the division’s disciplined
focus on returns. Declines were partly offset by exchange rate movements increasing
offshore lending;
• Deposits down 9%, mostly from a reduction in government balances, partly offset by higher
corporate term deposits; and
• Net interest margin down 7 basis points, from a change in funding mix partly offset by
disciplined margin management.
Non-interest
income down
$130m, 16%
• Decline due to the exit of Hastings ($180 million) in Second Half 2018;
• A $25 million movement in derivative valuation adjustment from a benefit of $14 million in
Second Half 2018 to a charge of $11 million in First Half 2019; and
• Partly offset by higher trading income in fixed income, commodities, and FX. Syndication
fees were also higher from some large transactions.
Expenses
down $117m,
15%
• The non-repeat of costs associated with the Hastings business and its exit reduced
expenses by $121 million. Excluding Hastings, expenses were up $4 million mostly reflecting
increased regulatory and compliance spending; and
• Productivity benefits from organisation redesign partly offset salary and inflationary
increases.
Impairment
charge of
$15m
compared to
a benefit of
$9m
• Credit quality remains sound with stressed exposures to TCE declining 3 basis points to
0.63%;
• Impaired exposures to TCE increased following one large facility migrating to impaired over
the half; and
• Impairment charges were higher from the migration of this facility to impaired. Lower write-
backs also contributed to the increase.
Economic
profit down
$6m, 2%
Economic profit was lower, reflecting franking credits in Second Half 2018 due to the higher
effective tax rate (associated with the non-deductibility of the Hastings goodwill write-down);
and
This impact was partly offset by the 1% increase in cash earnings and a 4% reduction in
allocated capital from disciplined management of credit limits.
2019 Interim financial results
Divisional results
Westpac Group 2019 Interim Financial Results Announcement | 71
First Half 2019 - First Half 2018
Cash earnings were $11 million or 2% lower than First Half 2018 mostly due to lower financial markets revenue
and a First Half 2019 impairment charge compared to an impairment benefit in First Half 2018. The decline was
partially offset by higher margins, and disciplined expense management.
Net interest
income up
$55m, 8%
Net lending was little changed compared to First Half 2018 (up $0.2 billion). Excluding
exchange rate movements, lending was down 1% ($0.9 billion) as the business focused on
returns;
Deposits were 3% lower primarily from a reduction in government balances, partly offset by
higher corporate term deposits; and
Net interest margin was up 7 basis points, from improved deposit and lending spreads
reflecting disciplined balance sheet management.
Non-interest
income down
$71m, 9%
Hastings contributed $23 million to non-interest income in First Half 2018;
Excluding Hastings, non-interest income was down $48 million or 7%, from:
- Lower markets income across both trading and sales, particularly in commodities; and
- An $11 million charge for derivative valuation adjustments.
Expenses
down $24m,
4%
• Hastings contributed $37 million to operating expenses in First Half 2018;
• Excluding Hastings, operating expenses were up $13 million or 2%. Most of the increase was
due to higher technology and regulatory and compliance expenses partly offset by
productivity benefits.
Impairment
charge of
$15m
compared to
benefit of
$6m
• Credit quality remains sound with stressed exposures to TCE of 0.63%, a reduction of 15
basis points compared to March 2018;
• Impaired exposures to TCE increased following one large facility migrating to impaired in
First Half 2019; and
• Impairment charges were higher from the migration of this facility to impaired. Lower write-
backs also contributed to the increase.
Economic
profit up
$26m, 11%
• While cash earnings were lower, a reduction in allocated capital saw economic profit higher;
and
• Allocated capital was lower from disciplined management of credit limits.
2019 Interim financial results
Divisional results
72 | Westpac Group 2019 Interim Financial Results Announcement
3.5 Westpac New Zealand
1
Westpac New Zealand is responsible for sales and service of banking, wealth and insurance products for
consumers, business and institutional customers in New Zealand. Westpac conducts its New Zealand banking
business through two banks in New Zealand: Westpac New Zealand Limited, which is incorporated in New
Zealand and Westpac Banking Corporation (New Zealand Branch), which is incorporated in Australia. Westpac
New Zealand operates via an extensive network of branches and ATMs across both the North and South Islands.
Business and institutional customers are also served through relationship and specialist product teams. Banking
products are provided under the Westpac brand while insurance and wealth products are provided under Westpac
Life and BT brands, respectively. New Zealand also maintains its own infrastructure, including technology,
operations and treasury. All figures are in New Zealand dollars (NZ$).
% Mov't % Mov't
Half Year Half Year Half Year Mar 19 - Mar 19 -
NZ$m March 19 Sept 18 March 18 Sept 18 Mar 18
Net interest income
1,000 994 964 1 4
Non-interest income
248 196 210 27 18
Net operating income
1,248 1,190 1,174 5 6
Operating expenses
(480) (464) (466) 3 3
Core earnings
768 726 708
6 8
Impairment benefits / (charges)
(14) 13 (38) large (63)
Operating profit before tax
754 739 670
2 13
Tax and non-controlling interests
(199) (205) (188) (3) 6
Cash earnings
555 534 482
4 15
Economic profit
249 252 207 (1) 20
Expense to income ratio
38.46% 38.99% 39.69% (53bps) (123bps)
Net interest margin
2.23% 2.25% 2.24% (2bps) (1bps)
As at As at As at
% Mov't % Mov't
31 March 30 Sept 31 March Mar 19 - Mar 19 -
NZ$bn 2019 2018 2018 Sept 18 Mar 18
Customer deposits
Term deposits
33.3 32.6 31.6 2 5
Other
30.9 29.3 30.0 5 3
Total customer deposits
64.2 61.9 61.6
4 4
Net loans
Mortgages
49.6 48.9 47.9 1 4
Business
30.9 29.8 29.5 4 5
Other
2.0 2.0 2.1 - (5)
Provisions
(0.4) (0.3) (0.4) 33 -
Total net loans
82.1 80.4 79.1
2 4
Deposit to loan ratio
78.20% 76.99% 77.88% 121bps 32bps
Total assets
93.4 90.0 89.8 4 4
TCE
113.9 112.0 111.7 2 2
Third party liquid assets
9.1 7.5 8.6 21 6
Average interest-earning assets
2
89.9 88.1 86.3 2 4
Total funds
10.9 10.7 10.3 2 6
As at As at As at
31 March 30 Sept 31 March
2019 2018 2018
Credit quality
Loan impairment charges/(benefits) to average loans annualised
0.03% (0.03%) 0.10%
Mortgage 90+ day delinquencies
0.14% 0.11% 0.16%
Other consumer loans 90+ day delinquencies
1.02% 0.62% 0.86%
Impaired exposures to TCE
0.13% 0.15% 0.21%
Total stressed exposures to TCE
1.57%
1.57% 1.86%
1
The Group has adopted AASB 9 Financial Instruments and AASB 15 Revenue from Contracts with Customers from 1 October 2018.
Statutory comparatives have not been restated. Refer to Note 1 in Section 4 for further detail. However, where applicable, cash
earnings comparatives (excluding expected credit loss provisioning) have been restated to aid comparability. Refer to the Cash
earnings policy in Section 1.3.4 for further detail. In addition, during First Half 2019, the Group has made a number of presentational
changes to the Balance Sheet and Income Statement. Both statutory and cash earnings comparatives have been restated. Refer to
Note 1 in Section 4 for further detail.
2
Averages are based on a six month period.
2019 Interim financial results
Divisional results
Westpac Group 2019 Interim Financial Results Announcement | 73
Financial performance (NZ$)
First Half 2019 - Second Half 2018
Cash earnings increased 4% over the half, supported by 2% loan growth and higher non-interest income, including
a gain on the sale of the division’s investment in Paymark (New Zealand’s payment switch business), partly offset
by increased investment in risk management and regulatory projects and higher impairment charges.
Net interest
income
up $6m, 1%
• Loans up 2%, primarily from growth in business lending with growth broadly spread across
segments. Mortgages increased $0.7 billion, from higher fixed rate lending partly offset by a
reduction in variable rate loans. Fixed rate mortgages represent 81% of the portfolio (up 2
percentage points over the half);
• Deposits fully funded loan growth over the half lifting the deposit to loan ratio over 78%.
Growth was spread across all products; and
• Net interest margin was down 2 basis points from competition in mortgages and mix changes
with customers continuing to prefer lower spread fixed rate loans. This was partially offset by
improved business spreads.
Non-interest
income up
$52m, 27%
• The gain on sale of Paymark contributed $40 million; and
• Higher investment income from a 2% rise in fund balances and an increase in business fees.
Expenses up
$16m, 3%
• Cost to income ratio was maintained below 40%;
• Most of the increase was driven by increased investment in risk management and regulatory
projects; and
• Excluding investment, costs were relatively flat with increases in salary and inflationary costs
offset by productivity savings. Productivity savings were due to the continued digitisation of
activity supporting a lower FTE over recent halves.
Impairment
charge of
$14m
compared to
an
impairment
benefit of
$13m
• Credit quality remains sound, with stressed exposures to TCE unchanged over the half.
• Consumer 90+ day delinquencies increased 40 basis points to 102 basis points, with the rise
due to seasonal trends, and a reduction in balances along with some operational changes.
Mortgage 90+day delinquencies remain low at 14 basis points;
• Impairment charges were a $27 million turnaround over the half as First Half 2019 reported
an impairment charge while Second Half 2018 recorded a benefit of $13 million supported by
write-backs and the dairy overlay no longer required.
Economic
profit down
$3m, 1%
• While cash earnings were up 4%, economic profit was down from additional capital held by
the division to meet regulatory requirements.
First Half 2019 - First Half 2018
Cash earnings increased 15% over First Half 2018, supported by a gain on the sale of Paymark, and a $24 million
reduction in impairment charges.
Net interest
income
up $36m, 4%
• Net loans increased $3.0 billion (4%), evenly spread across mortgages and business; and
• Net interest margin was 1 basis point lower from lower spreads across mortgages and
deposits. Most of the decline was due to mix with more fixed rate mortgages. This was partly
offset by higher business lending spreads.
Non-interest
income up
$38m, 18%
• The gain on sale of Paymark contributed $40 million to non-interest income;
• Higher merchant fees and institutional fees also contributed to the increase; and
• This was partly offset by lower fee income following the decision to eliminate certain
consumer fees.
Expenses
up $14m, 3%
• Most of the increase was driven by further investment in risk management and regulatory
programs; and
• Excluding investment, costs were broadly unchanged with increases in salary and
inflationary costs offset by productivity savings (including full period benefit of 3% FTE
reduction) and increased digitisation of activities.
Impairment
charges down
$24m, 63%
• Credit quality remains sound, with stressed exposures to TCE of 1.57%, 29 basis points
lower than March 2018, from improvements in the dairy sector. Consumer 90+ day
delinquencies increased 16 basis points to 102 basis points, including from the 5% reduction
in the portfolio; and
• Impairment charges benefited from lower new individually assessed provisions and lower
collective provisions, consistent with the reduction in stressed exposures.
Economic
profit up
$42m, 20%
• The 20% increase in economic profit is driven by improved cash earnings partially offset by
the additional capital held to meet regulatory requirements.
2019 Interim financial results
Divisional results
74 | Westpac Group 2019 Interim Financial Results Announcement
3.6 Group Businesses
1
This segment comprises:
• Treasury which is responsible for the management of the Group’s balance sheet including wholesale funding,
capital and management of liquidity. Treasury also manages the interest rate risk and foreign exchange risks
inherent in the balance sheet, including managing the mismatch between Group assets and liabilities.
Treasury’s earnings are primarily sourced from managing the Group’s balance sheet and interest rate risk,
(excluding Westpac New Zealand) within set risk limits;
• Group Technology
2
, which comprises functions for the Australian businesses, is responsible for technology
strategy and architecture, infrastructure and operations, applications development and business integration;
• Core Support
3
, which comprises functions performed centrally, including Australian banking operations,
property services, strategy, finance, risk, compliance, legal, human resources, and customer and corporate
relations; and
• Group Businesses also includes earnings on capital not allocated to divisions, accounting entries for certain
intra-group transactions that facilitate presentation of performance of the Group’s operating segments, earnings
from non-core asset sales, earnings and costs associated with the Group’s Fintech investments, and certain
other head office items such as centrally raised provisions.
% Mov't % Mov't
Half Year Half Year Half Year Mar 19 - Mar 19 -
$m March 19 Sept 18 March 18 Sept 18 Mar 18
Net interest income
299 375 436 (20) (31)
Non-interest income
10 21 15 (52) (33)
Net operating income
309 396 451 (22) (31)
Operating expenses
(252) (275) (283) (8) (11)
Core earnings
57 121 168
(53) (66)
Impairment benefits / (charges)
37 14 (13) 164 large
Operating profit before tax
94 135 155
(30) (39)
Tax and non-controlling interests
(87) (87) (93) - (6)
Cash earnings
7 48 62
(85) (89)
Treasury
% Mov't % Mov't
Half Year Half Year Half Year Mar 19 - Mar 19 -
$m March 19 Sept 18 March 18 Sept 18 Mar 18
Net interest income
239 331 406 (28) (41)
Non-interest income
(4) 4 6 large large
Net operating income
235 335 412 (30) (43)
Cash earnings
143 211 269
(32) (47)
Treasury Value at Risk (VaR)
4
$m Average High Low
Six months ended 31 March 2019
26.8
33.6 20.9
Six months ended 30 September 2018
29.3
32.6 25.6
Six months ended 31 March 2018
39.3
56.7 27.0
1
The Group has adopted AASB 9 Financial Instruments and AASB 15 Revenue from Contracts with Customers from 1 October 2018.
Statutory comparatives have not been restated. Refer to Note 1 in Section 4 for further detail. However, where applicable, cash
earnings comparatives (excluding expected credit loss provisioning) have been restated to aid comparability. Refer to the Cash
earnings policy in Section 1.3.4 for further detail. In addition, during First Half 2019, the Group has made a number of presentational
changes to the Balance Sheet and Income Statement. Both statutory and cash earnings comparatives have been restated. Refer to
Note 1 in Section 4 for further detail.
2
Costs are fully allocated to other divisions in the Group.
3
Costs are partially allocated to other divisions in the Group, with costs attributed to enterprise activity retained in Group Businesses.
4
VaR includes trading book and banking book exposures. The banking book component includes interest rate risk, credit spread risk in
liquid assets and other basis risks as used for internal management purposes.
2019 Interim financial results
Divisional results
Westpac Group 2019 Interim Financial Results Announcement | 75
Financial performance
First Half 2019 - Second Half 2018
Cash earnings decreased $41 million in the half primarily from lower Treasury revenue partly offset by a higher
impairment benefit and lower expenses.
Net operating
income down
$87 million,
22%
Lower Treasury revenue related to interest rate risk management and impact of New
Zealand earnings hedges; partly offset by
Revaluation gains on a fintech investment.
Expenses
down $23
million, 8%
Lower costs associated with the Royal Commission and litigation raised in the prior half;
partly offset by
Non repeat of payroll related rebates received in Second Half 2018 and higher Group
insurance costs.
Impairment
benefit
$23 million
movement
Movement in impairments reflecting a $37 million benefit from a reduction to centrally held
overlays during First Half 2019, compared to a $14 million benefit in Second Half 2018.
First Half 2019 - First Half 2018
Cash earnings decreased $55 million primarily from lower Treasury revenue, partly offset by a lower impairment
charge and a fall in expenses.
Net operating
income down
$142 million,
31%
Lower Treasury revenue related to interest rate risk management (down $167 million); partly
offset by increased earnings from centrally held capital.
Expenses
down $31
million, 11%
Lower regulatory and compliance costs, including costs associated with the Royal
Commission and lower employee costs; partly offset by
Expenses associated with the Group’s fintech investments and higher insurance costs
Impairment
charges
$50 million
movement
Impairments were a $37 million benefit from a reduction to centrally held overlays during First
Half 2019, compared to a $13 million charge in First Half 2018.
Tax and non-
controlling
interests
down $6
million, 6%
Effective tax rate is higher than the Australian company tax rate of 30%, mostly due to the
impact of hybrid distributions that are not tax deductible.
2019 Interim financial report
Table of contents
76 | Westpac Group 2019 Interim Financial Results Announcement
4.0 2019 Interim Financial Report
4.1 Directors’ report 77
4.2 Consolidated income statement 105
4.3 Consolidated statement of comprehensive income 106
4.4 Consolidated balance sheet 107
4.5 Consolidated statement of changes in equity 108
4.6 Consolidated cash flow statement 109
4.7 Notes to the consolidated financial statements 110
Note 1 Financial statements preparation 110
Note 2 Segment reporting 121
Note 3 Net interest income 125
Note 4 Non-interest income 126
Note 5 Operating expenses 127
Note 6 Income tax 128
Note 7 Earnings per share 129
Note 8 Average balance sheet and interest rates 130
Note 9 Loans 131
Note 10 Provisions for expected credit losses/impairment charges 132
Note 11 Credit quality 135
Note 12 Deposits and other borrowings 137
Note 13 Fair values of financial assets and liabilities 138
Note 14 Provisions, contingent liabilities, contingent assets and credit commitments 144
Note 15 Shareholders’ equity 149
Note 16 Notes to the consolidated cash flow statement 151
Note 17 Subsequent events 152
4.8 Statutory statements 153
2019 Interim financial report
Directors’ report
Westpac Group 2019 Interim Financial Results Announcement | 77
4.0 Interim Financial Report 2019
4.1 Directors’ report
The Directors of Westpac present their report together with the financial statements of Westpac and its controlled
entities (collectively referred to as ‘the Group’) for the half year ended 31 March 2019.
Directors
The names of the Directors of Westpac holding office at any time during, and since the end of, the half year and
the period for which each has served as a Director are set out below:
Name Position
Lindsay Maxsted Chairman since December 2011 and Director since March 2008.
Brian Hartzer Managing Director & Chief Executive Officer since February 2015.
Nerida Caesar Director since September 2017.
Ewen Crouch AM Director since February 2013.
Alison Deans Director since April 2014.
Craig Dunn Director since June 2015.
Anita Fung Director since October 2018.
Steven Harker Director since March 2019.
Peter Hawkins Retired in December 2018. Director from December 2008.
Peter Marriott Director since June 2013.
Peter Nash Director since March 2018.
Margaret Seale Director since March 2019.
Review and results of the Group’s operations during the half year
Net profit attributable to owners of Westpac Banking Corporation for First Half 2019 was $3,173 million, a
decrease of $1,025 million or 24% compared to First Half 2018. First Half 2019 included significant provisions for
estimated customer refunds, payments and associated costs, and costs associated with the restructuring of the
Wealth business, which together reduced net profit after tax by $753 million
1
. These items are discussed further in
Note 14 of the 2019 Interim Financial Report.
Net interest income decreased $15 million, compared to First Half 2018. Average interest-earning assets grew 4%
mostly from total loan growth but this was more than offset by a net interest margin decrease of 7 basis points to
2.09%. The movement in net interest income included:
• $212 million of provisions for estimated customer refunds and payments;
• a net reduction from economic hedges of $123 million; and
• lower revenue from our Treasury division outweighed the growth in other divisions; offset by
• an increase of $330 million due to the reclassification of line fees from net fee income to interest income.
Net fee income decreased $452 million or 35% compared to First Half 2018 primarily due to the reclassification of
line fees to net interest income and a $165 million impact of provisions for estimated customer refunds and
payments.
Net wealth management and insurance income decreased $625 million or 66% compared to First Half 2018
primarily due to additional provisions for estimated customer refunds and payments of $435 million, higher general
insurance claims and lower wealth management income due to changes in pricing structure, the cessation of
grandfathered commissions and the exit of Hastings in Second Half 2018.
Trading income decreased $50 million or 10% due to lower income in the markets business.
Other income increased $38 million or 43% mainly due to the profit on sale of an associate.
1
The impact (before tax) of these items are reflected within the additions/reversal of unutilised provisions line items of the Compliance,
regulation and remediation provision, and the restructuring provision in Note 14.
2019 Interim financial report
Directors’ report
78 | Westpac Group 2019 Interim Financial Results Announcement
Operating expenses increased $436 million or 9% compared to First Half 2018. The rise was mainly due to:
• $84 million of provisions for estimated costs associated with implementing customer refunds and payments;
• $190 million of provisions for the restructuring of the Wealth business; and
• $162 million increase in other costs including $97 million of higher costs associated with the Group’s
investment program, largely across banking and wealth platforms.
Impairment charges were $60 million or 15% lower compared to First Half 2018. Asset quality remained sound,
with stressed exposures as a percentage of total committed exposures at 1.10%, up 1 basis point compared to
First Half 2018.
The effective tax rate of 30.3% was lower than the First Half 2018 effective tax rate of 30.4%.
The Board has determined an interim dividend of 94 cents per share, unchanged compared to the interim dividend
determined for First Half 2018. The interim dividend will be fully franked.
A review of the operations and results of the Group and its divisions for the half year ended 31 March 2019 is set
out in Section 2 and Section 3 of this Interim Financial Results Announcement and in ‘Risk factors’, which forms
part of the Directors’ Report.
Further information about our financial position and financial results is included in the financial statements, which
form part of the 2019 Interim Financial Report.
2019 Interim financial report
Directors’ report
Westpac Group 2019 Interim Financial Results Announcement | 79
Significant developments
Westpac significant developments
Customer remediation
In First Half 2019, the Group booked an after tax cost of $617 million of provisions for estimated customer refunds,
payments and associated costs. This half, the Group has undertaken steps designed to accelerate the processing
of customer refunds and centralise oversight of certain remediation under the Chief Operating Officer.
In First Half 2019 the major items included in the provisions were related to:
• Customer refunds of ongoing advice service fees associated with the Group's salaried financial planners.
These provisions add to those in prior periods and reflect an increase in the estimated proportion of instances
where records of financial advice are insufficient for the purposes of the remediation;
• Estimated customer refunds of ongoing advice service fees charged by the Group's authorised representatives
that provided financial planning services under the Magnitude and Securitor brands. The provisions have been
based on an estimate of the proportion of instances where records of financial advice are insufficient for the
purposes of remediation. The provision is an estimate of fees and interest that may be paid to customers along
with costs of implementing the remediation;
• Refunds for certain consumer and business customers that had interest only loans that did not automatically
switch, when required, to principal and interest home loans; and
• Refunds to certain business customers who were provided with business loans where they should have been
provided with loans covered by the National Consumer Credit Protection Act 2009 (Cth).
Changes to wealth strategy
On 19 March 2019, Westpac announced that it had reset its wealth strategy and would make a number of changes
to its wealth business. Key changes announced by Westpac include:
• realigning our major BT Financial Group businesses into the Consumer and Business divisions, with the
changes to take effect from 1 April 2019;
• exiting the provision of personal financial advice by Westpac Group salaried financial advisers and authorised
representatives; and
• moving to a referral model for financial advice by utilising a panel of advisers or adviser firms.
As part of the exit of financial advice, Westpac also announced that it had entered into a sale agreement with
Viridian Advisory, which will see many BT Financial Advice ongoing advice customers offered an opportunity to
transfer to Viridian subject to their consent. A number of the Group's salaried financial advisers and support staff
will transition to Viridian from the anticipated completion of 30 June 2019. Some authorised representatives may
also move to Viridian by 30 September 2019.
First strike against remuneration report
On 12 December 2018 at Westpac's Annual General Meeting of shareholders, Westpac incurred a first strike
against its remuneration report. A strike occurs where a company's remuneration report receives a 'no' vote of
25% or more. If Westpac receives a second strike at its 2019 Annual General Meeting, a spill resolution will be put
to shareholders. If 50% or more of votes cast are in favour of that spill resolution, a spill meeting is required to be
held within 90 days. At that spill meeting, certain directors will be required to stand for re-election.
Financial crime
In an environment of ongoing legislative reform, regulatory change and increased industry focus, Westpac
continues to progress a program of work to improve its management of financial crime risks (including Anti-Money
Laundering and Counter-Terrorism Financing (AML/CTF), sanctions and Anti-Bribery and Corruption). This work
has included a review of our AML/CTF policies, the completeness of data feeding into our AML/CTF systems and
our AML/CTF processes and controls. Westpac has been regularly updating AUSTRAC on progress and has
commenced implementing a number of improvements to its AML/CTF Program, governance, policies, systems
and controls together with related remediation work in respect of certain reporting practices. These efforts have
related to matters such as customer on-boarding, ongoing customer due diligence, transaction monitoring and
regulatory reporting (including in relation to International Funds Transfer Instructions (IFTIs), Suspicious Matter
Reports and Threshold Transaction Reports).
2019 Interim financial report
Directors’ report
80 | Westpac Group 2019 Interim Financial Results Announcement
Under Australia's AML/CTF Act, the 'sender' financial institution of an IFTI transmitted out of Australia, or the
'recipient' financial institution of an IFTI transmitted into Australia, is required to report the IFTI to AUSTRAC within
ten business days of the instruction being sent or received. The Group has self-reported to AUSTRAC a failure to
report a large number of IFTIs (as required under Australia's AML/CTF Act). The majority of these IFTIs concern
batch instructions received by Westpac through one WIB product between 2009 and 2018 from a small number of
correspondent banks for payments made predominantly to beneficiaries living in Australia in Australian dollars.
Through the product, Westpac facilitates payments on behalf of clients of certain of its correspondent banks. The
majority of the payments are low value, recurring and made by Government pension funds and corporates. As
reported in the Group's 2018 Annual Report, the Group is continuing to work with AUSTRAC to remediate the
failure to report IFTIs. AUSTRAC is investigating this matter and, over the last six months, has issued a number of
detailed notices requiring the production of documents and information.
Further details regarding the consequences of the failure to comply with financial crime obligations, which could
include regulatory enforcement action by AUSTRAC or other regulators, including litigation resulting in fines and/or
penalties, is set out in the Risk Factors section.
Regulatory and political focus
Royal Commission into the banking, superannuation and financial services industries
On 14 December 2017, the Australian Government established a Royal Commission into potential misconduct in
Australia's banks and other financial services entities. The terms of reference for the Royal Commission required it
to consider (amongst other things) the conduct of banks, insurers, financial service providers, superannuation
funds (not including self-managed superannuation funds) and intermediaries between borrowers and lenders, and
the effectiveness of Australian regulators in addressing misconduct in financial institutions. The Royal Commission
was not required to inquire into matters such as the financial stability of Australia's banks.
The Royal Commission's inquiries made public instances where the Group or entities or persons associated with
the Group engaged in potential misconduct or failed to meet community standards and expectations. The Royal
Commission's terms of reference were broad and enabled the Royal Commission to investigate potential
misconduct in a wide range of areas. The public hearings of the Royal Commission examined consumer lending
practices, the provision of financial advice, business lending to small and medium enterprises, experiences with
financial entities in regional and remote communities, superannuation and insurance as well as policy issues
related to these matters. Westpac provided the Commission with documents and witness statements and made
submissions in all rounds of the Royal Commission and participated in certain rounds of public hearings.
The Commission's Final Report was released on 4 February 2019 and contained 76 express recommendations, 51
of which will likely require action by Westpac. The recommendations are broadly aimed at protecting consumers
against misconduct, providing adequate redress and addressing asymmetries of power and information between
financial services entities and their customers. Implementation of the recommendations is likely to have a
significant impact on banking and financial services entities and their regulators. Some of the most significant
recommendations include those concerning the regulation of mortgage brokers, introducing a broader definition of
'small business' in the Banking Code of Practice so that the code will apply to more small businesses, the
prohibition of unsolicited sales of insurance and superannuation products and removal of grandfathered
commissions for financial advisers. Westpac has implemented or is currently in the process of implementing a
number of those recommendations which require action by financial services participants. The remainder will
require legislated reform or further consideration, action or guidance from Government or regulators.
Since the release of the Final Report the Government stated it will take action on all of the recommendations
contained within it. It has to date acted on a number of those recommendations including passing legislation
concerning penalties applicable to superannuation fund trustees and directors for breach of their duties and has
announced policy and legislative change proposals. Following the 2019 Federal election, the elected Government
is expected to have a significant program of work to complete in order to implement the Final Report
recommendations.
In addition, civil claims have been brought against financial institutions in relation to certain matters considered
during the Royal Commission, and Commissioner Hayne has referred several cases of misconduct to the financial
regulators.
APRA self-assessment
On 1 May 2018, in the context of the publication of the final report in relation to the prudential inquiry into the
Commonwealth Bank of Australia, APRA indicated that all regulated financial institutions would benefit from
conducting a self-assessment into their frameworks and practices in relation to governance, culture and
accountability. For large financial institutions such as Westpac, APRA noted it would be seeking written
assessments in relation to these matters that have been reviewed and endorsed by their Board. Westpac
completed its self-assessment and submitted the report to APRA on 29 November 2018. Westpac has developed
its action plan and is having ongoing discussions with APRA in relation to implementation of the recommendations
from the assessment.
2019 Interim financial report
Directors’ report
Westpac Group 2019 Interim Financial Results Announcement | 81
Banking Fairness Fund
On 25 February 2019, the Australian Labor Party announced that, if elected at the 2019 Federal election, it will
establish a Banking Fairness Fund. The proposal will require the nine biggest banks in Australia to contribute
$160 million per year over 4 years, proportionally by market capitalisation. The aim of the fund is to support
community services including organisations which provide assistance to victims of banking misconduct, and would
increase the number of government-funded financial counsellors from 500 to 1,000.
Regulatory reviews and inquiries
Residential mortgage lending - reviews by and engagement with regulators
In recent years, regulators have focused on aspects of residential mortgage lending standards across the industry.
APRA has been looking at, and speaking publicly about, the broader issue of bank serviceability standards
pertaining to residential mortgage lending.
Westpac has continued to engage APRA on its progress in strengthening controls in residential mortgage lending
and enhancements to its residential mortgage risk management framework, including oversight, operating systems
and controls, and assurance.
ASIC continues to focus on interest only mortgage origination and high risk customer groups (such as customers
with reverse mortgages). On 14 February 2019 ASIC released a consultation paper to update its guidance on
responsible lending. The paper seeks to review and update the guidance contained in Regulatory Guide RG 209
Credit licensing: Responsible lending conduct, and will consider whether the guidance remains effective and
identify changes and additions to the guidance that may assist holders of Australian credit licences to better
understand ASIC's expectations.
ASIC has also reviewed public statements by some banks (including Westpac) about interest rate changes,
following the introduction of APRA's macro-prudential limits for ADIs in respect of interest only lending flows.
Westpac is working with ASIC on its reviews in these areas.
ACCC residential mortgage products price inquiry
The ACCC undertook a specific inquiry into the pricing of residential mortgages by those banks affected by the
Bank Levy (including Westpac), which included monitoring the extent to which the Bank Levy was passed on to
customers. The final report was published in December 2018, and made a number of findings about the pricing of
residential mortgages, including that:
• the banks the subject of the inquiry did not change residential mortgage prices specifically to recover the costs
of the Bank Levy;
• the current nature of discretionary mortgage pricing causes inefficiency and stifles price competition;
• on average, new borrowers pay lower interest rates than existing borrowers; and
• a borrower's willingness to negotiate with lenders is an important factor in the pricing of their residential
mortgages.
AFCA look back review
On 4 February 2019, the Australian Government announced that, in response to the recommendations contained
in the Royal Commission's Final Report, it will expand the remit of AFCA for 12 months so that it can consider
customer claims dating back to 1 January 2008 and award compensation where appropriate. AFCA has a broader
jurisdiction than previous dispute resolution bodies which it has replaced and the current impact of this reform on
Westpac, if any, is currently uncertain.
Increased regulatory powers and oversight
Banking Executive Accountability Regime
On 1 July 2018 the Banking Executive Accountability Regime (BEAR), which applies to large ADIs such as
Westpac, came into effect. The Government's stated intention of BEAR was to introduce a strengthened
responsibility and accountability framework for the most senior and influential directors and executives in ADI
groups (referred to as 'accountable persons' under BEAR).
Westpac implemented BEAR, including filing all required documents with APRA, by the required date of
1 July 2018. The Royal Commission's Final Report included some key recommendations in relation to BEAR,
including the joint administration of BEAR by ASIC and APRA and the extension of BEAR to all APRA regulated
financial services institutions. These recommendations have not required any action from Westpac at this stage,
however Westpac will continue to monitor the government and regulatory response to these recommendations.
2019 Interim financial report
Directors’ report
82 | Westpac Group 2019 Interim Financial Results Announcement
Australian Securities and Investments Commission (ASIC) Enforcement Review Taskforce
On 19 October 2016, the Australian Government announced that the ASIC Enforcement Review Taskforce
(Taskforce) would conduct a review into the suitability of ASIC's existing regulatory tools (including the penalties
available) and whether they need to be strengthened.
The Taskforce completed its report in December 2017 and made 50 recommendations to the Australian
Government.
Progress has been made in implementing these recommendations, including:
• ASIC releasing a report on 25 September 2018 on the breach reporting processes of 12 financial services
groups, including Westpac;
• the Australian Parliament passing the Treasury Laws Amendment (Strengthening Corporate and Financial
Sector Penalties) Act 2019 (Cth), expanding ASIC's powers in respect of corporate and financial services
misconduct, including the criminal and civil penalties which apply. The legislation is further discussed below;
and
• the Australian Government announcing an increase in ASIC's funding to introduce a close and continuous
monitoring program, in which ASIC embeds staff within the institutions which it supervises, which is further
discussed below.
Enhanced penalties for corporate and financial sector misconduct
On 12 March 2019, the Treasury Laws Amendment (Strengthening Corporate and Financial Sector Penalties) Act
2019 (Cth) received royal assent. The Act strengthens penalties for corporate and financial sector misconduct
consistent with the ASIC Enforcement Review Taskforce recommendations. The Government's previous draft bill
was amended by the Senate when passing the legislation to increase the maximum criminal penalties for
individuals from the originally proposed 10 years to 15 years, and to increase the cap on certain civil penalties for
corporations from the originally proposed $210 million to $525 million.
Key aspects of the Act are to:
• update the penalties for certain criminal offences in legislation administered by ASIC, including tripling the
maximum imprisonment penalties for certain criminal offences (from 5 to 15 years), introducing a formula to
calculate financial penalties for contraventions of civil penalty provisions by individuals and companies, and
removing imprisonment as a penalty but increasing the financial penalties for all strict and absolute liability
offences;
• introduce ordinary criminal offences that sit alongside strict and absolute liability offences;
• introduce the ability for Courts to make relinquishment orders for civil penalty provision contraventions;
• expand the civil penalty regime by making a wider range of offences subject to civil penalties, such as failures
by Australian financial services licensees to act efficiently, fairly and honestly, and failures to report significant
breaches within 10 days of becoming aware of the breach or likely breach;
• expand the infringement notice regime;
• introduce a new test that applies to all dishonesty offences under the Corporations Act 2001 (Cth); and
• ensure the Courts prioritise compensating victims over ordering the payment of financial penalties.
ASIC's close and continuous monitoring program
On 4 September 2018, ASIC announced a new supervisory approach in which ASIC officers will be embedded in
major financial institutions, including Westpac. The stated goal of the program is to actively limit future financial
harm to consumers, investors and markets and to catalyse positive, consumer oriented, behavioural change.
To date, the model adopted by ASIC is for officers to make extended onsite visits to major financial institutions.
ASIC's program is examining culture and processes in major financial institutions through three streams: Breach
Reporting, Corporate Governance and Internal Dispute Resolution. ASIC was onsite at Westpac examining
Breach Reporting from 18 February to 12 April 2019. Westpac has responded to a number of notices from ASIC in
connection with the program.
Product design and distribution obligations and product intervention power
On 5 April 2019, the Treasury Laws Amendment (Design and Distribution Obligations and Product Intervention
Powers) Act 2019 (Cth) received royal assent. The Act amends the Corporations Act 2001 (Cth) and the National
Consumer Credit Protection Act 2009 (Cth) and grants ASIC a product intervention power and introduces a new
'principles-based' product design and distribution obligation on issuers and distributors.
2019 Interim financial report
Directors’ report
Westpac Group 2019 Interim Financial Results Announcement | 83
Regulatory enforcement approach
On 16 April 2019, APRA released its Enforcement Approach with immediate effect. The new Enforcement
Approach follows the results of its Enforcement Review, released on the same day. The Enforcement Review
made seven recommendations which were designed to help APRA better leverage its enforcement powers to
achieve prudential outcomes.
In response to the Enforcement Review, APRA stated it would implement all recommendations including
increasing APRA's enforcement appetite from a "last resort" to a "constructively tough" approach. The new
enforcement approach is endorsed by the APRA Board and sets out how it will use its enforcement powers to
prevent and address serious prudential risks, and to hold entities and individuals to account. APRA's approach
states that it may do this well before the risks (whether financial, operational or behavioural) present an immediate
threat to financial viability. Further, where entities or individuals are failing to meet prudential obligations, APRA will
act quickly and forcefully, and will be willing to set public examples to deter unacceptable practices from occurring
in the future.
On 26 February 2019, the ACCC signalled a stronger enforcement stance in its annual Compliance and
Enforcement Policy refresh. The ACCC's competition enforcement approach and objectives are supported by
increased budget support from the Government announced at the end of 2018.
In October 2018, ASIC committed to accelerating enforcement activities, conducting more civil and criminal
enforcement actions against large financial institutions and adopting a 'why not litigate?' enforcement stance.
Following the release of the Royal Commission's Final Report, ASIC also determined to establish a separate
Office of Enforcement within ASIC, which is expected to be completed in 2019.
General regulatory changes affecting our business
Banking Code of Practice
On 31 July 2018, ASIC approved the Banking Code of Practice with an implementation date of 1 July 2019 for
each bank that has adopted the Code (including Westpac). The new code replaces the previous version, the Code
of Banking Practice 2013, and introduces a range of new measures to make banking products easier to
understand and more customer focused. The Code sets out the standards of practice and service in the Australian
banking industry for individual and small business customers, and their guarantors. The new Code introduces a
range of new measures including abolishment of fees and commission on lenders mortgage insurance, a
commitment to take extra care with vulnerable customers and train staff to help, simplified loan contracts for small
business written in plain English and that are easier to understand, better protection for guarantors and stronger
enforcement of the Code.
The Code will be further updated with key amendments in response to the recommendations contained in the
Royal Commission's Final Report, which recommended changes in relation to the protection of small businesses
and having a greater focus on customers in remote areas and those with limited English. These changes include
banning informal overdrafts on basic accounts without prior express agreement with the customer, abolishing
dishonour fees on basic bank accounts and following AUSTRAC's guidance on the identification and verification of
persons of Aboriginal or Torres Strait Islander heritage.
Open banking regime
On 21 December 2018, the Australian Treasury released a revised timetable for the introduction of open banking.
The timetable for the big four Australian banks (including Westpac) is now as follows:
• from 1 July 2019, product data for credit cards, debit cards, deposit accounts and transaction accounts will be
made available;
• from 1 July 2019, the ACCC and CSIRO's Data 61 will launch a pilot program with the big four Australian banks
to test the performance, reliability and security of the open banking system;
• by no later than February 2020, consumer, account and transaction data for credit and debit cards, deposit
accounts and transaction accounts will be made available;
• from February 2020, product data for mortgages, and consumer, account and transaction data for mortgage
accounts will be made available; and
• from July 2020, product data for personal loan and other accounts, and consumer, account and transaction
data for personal loan and other accounts will be made available.
2019 Interim financial report
Directors’ report
84 | Westpac Group 2019 Interim Financial Results Announcement
Also on 21 December 2018, the Australian Treasury released a Privacy Impact Assessment on the privacy risks
associated with implementing a consumer data right together with risk mitigation strategies. On the same date the
ACCC released the Consumer Data Right Rules Outline setting out proposed draft rules for the regime. On
13 February 2019, the Treasury Laws Amendment (Consumer Data Right) Bill 2019 was introduced into the
House of Representatives that will amend the Competition and Consumer Act 2010 (Cth), the Privacy Act 1988
(Cth) and the Australian Information Commissioner Act 2010 (Cth) to introduce a consumer data right. The bill was
referred to the Senate Economics Legislation Committee which reported on it on 21 March 2019, and
recommended the passage of the bill without amendment. Given the bill was not passed prior to the Federal
Election being called, there is a possibility that amendments will be made to it in the future. On 29 March 2019, the
ACCC published an exposure draft of the Competition and Consumer (Consumer Data) Rules 2019 for
consultation.
Comprehensive Credit Reporting (CCR)
On 28 March 2018, the National Consumer Credit Protection Amendment (Mandatory Comprehensive Credit
Reporting) Bill 2018 (Cth) was introduced into Parliament. While the bill remains in the Senate, if passed in its
current form, the bill will mandate the provision of CCR data to credit reporting bodies. Westpac is committed to
the use of CCR to support our principles of responsible lending, and as such we voluntarily supplied 55% of our
consumer credit accounts on 17 September 2018.
Westpac will supply the residual 45% of consumer credit accounts following completion of successful data testing
protocols by 17 September 2019. To support our implementation, Westpac is now a signatory of the Principles of
Reciprocity and Data Exchange, which provides governance and most importantly key consumer data protection
protocols within the CCR data sharing environment.
Litigation
ASIC's responsible lending litigation against Westpac
On 1 March 2017, ASIC commenced Federal Court proceedings against Westpac in relation to certain home loans
entered into between December 2011 and March 2015, which were automatically approved by Westpac's systems
as part of broader processes. On 4 September 2018, Westpac and ASIC agreed to settle the proceedings on the
basis of a proposed $35 million penalty and declarations that Westpac contravened the National Consumer Credit
Protection Act 2009 (Cth). The proposed settlement was subject to Court approval. However, on 13 November
2018, the Court did not approve the proposed settlement. Accordingly, the proceedings remain on foot. The trial is
scheduled for May 2019.
Outbound scaled advice division proceedings
On 22 December 2016, ASIC commenced Federal Court proceedings against BT Funds Management Limited
(BTFM) and Westpac Securities Administration Limited (WSAL) in relation to a number of superannuation account
consolidation campaigns conducted between 2013 and 2016. ASIC has alleged that in the course of some of
these campaigns, customers were provided with personal advice in contravention of a number of Corporations Act
2001 (Cth) provisions. ASIC has selected 15 specific customers as the focus of their claim. Judgment was handed
down on 21 December 2018. The Court found that no personal advice had been provided and that BTFM and
WSAL did not contravene the relevant personal advice provisions. The Court also found that BTFM and WSAL
had each contravened section 912A(1)(a) of the Corporations Act insofar as they had failed to do all things
necessary to ensure that financial services were provided efficiently, honestly and fairly through the adoption of the
relevant training and coaching frameworks used in certain superannuation consolidation campaigns. In February
2019, ASIC filed an appeal. Westpac has cross-appealed the section 912A(1)(a) finding. The appeal is expected
to be heard later this year.
ASIC's proceedings against Westpac for poor financial advice by a financial planner
On 14 June 2018, ASIC commenced proceedings in the Federal Court against Westpac in relation to alleged poor
financial advice provided by a former financial planner, Mr Sudhir Sinha. Mr Sinha was dismissed by Westpac in
November 2014 and subsequently banned by ASIC. Westpac has proactively initiated remediation to identify
and compensate affected customers and has completed remediation activities. ASIC's proceedings relate to
advice provided by Mr Sinha in respect of four specific customer files. The matter was heard by the Court on
15 April 2019 and judgment has been reserved.
2019 Interim financial report
Directors’ report
Westpac Group 2019 Interim Financial Results Announcement | 85
Class action against Westpac Banking Corporation and Westpac Life Insurance Services Limited
On 12 October 2017, a class action was filed in the Federal Court of Australia on behalf of customers who, since
February 2011, obtained insurance issued by Westpac Life Insurance Services Limited (WLIS) on the
recommendation of financial advisers employed within the Westpac Group. The plaintiffs have alleged that aspects
of the financial advice provided by those advisers breached fiduciary and statutory duties owed to the advisers'
clients, including the duty to act in the best interests of the client, and that WLIS was knowingly involved in those
alleged breaches. Westpac and WLIS are defending the proceedings. These proceedings are currently stayed by
order of the Court, pending the outcome of an appeal concerning a procedural issue unrelated to the substantive
claims made in the class action.
BBSW proceedings
Following ASIC's investigations into the interbank short-term money market and its impact on the setting of the
bank bill swap reference rate (BBSW), on 5 April 2016, ASIC commenced civil proceedings against Westpac in the
Federal Court of Australia, alleging certain misconduct, including market manipulation and unconscionable
conduct. The conduct that was the subject of the proceedings was alleged to have occurred between 6 April 2010
and 6 June 2012. ASIC sought declarations from the Court that Westpac breached various provisions of the
Corporations Act 2001 (Cth) and the Australian Securities and Investments Commission Act 2001 (Cth), pecuniary
penalties of unspecified amounts and orders requiring Westpac to implement a comprehensive compliance
program for persons involved in Westpac's trading in the relevant market. The proceedings were heard in late
2017. On 24 May 2018, Justice Beach found that Westpac had not engaged in market manipulation or misleading
or deceptive conduct under the Corporations Act 2001 (Cth). His Honour also found that there was no 'trading
practice' of manipulating the BBSW rate. However, the Court found that Westpac engaged in unconscionable
conduct on 4 occasions and that Westpac breached its supervisory duty. On 9 November 2018, the Court ordered
Westpac to pay a penalty of $3.3 million, and have an independent expert review particular aspects of Westpac's
compliance arrangements. Westpac's liability for a proportion of ASIC's costs will be determined in the coming
months.
In August 2016, a class action was filed in the United States District Court for the Southern District of New York
against Westpac and large number of Australian and international banks alleging misconduct in relation to the
bank bill swap reference rate. In April 2019, an amended claim was filed by the Plaintiffs. Westpac is defending the
proceedings.
Responsible lending class action
On 21 February 2019, a class action against Westpac was filed in the Federal Court of Australia. The Court
documents provide limited details, however, the claims appear to allege that Westpac did not comply with its
responsible lending obligations and entered into certain home loans that it should otherwise have assessed as
unsuitable. The allegations include that Westpac failed to properly verify customer expenses for the period from
1 January 2011 onwards, and did not properly assess repayments for interest only loans for the period from
1 January 2011 to August 2015. Westpac is defending the proceedings.
Regulatory capital transactions
Issue of Westpac Capital Notes 6
On 18 December 2018, Westpac issued approximately $1.42 billion of securities known as Westpac Capital Notes
6 which qualify as Additional Tier 1 capital under APRA's capital adequacy framework.
Transfer and redemption of Westpac Capital Notes
On 18 December 2018, approximately $722 million of Westpac Capital Notes were transferred to the Westpac
Capital Notes nominated party for $100 each pursuant to the Westpac Capital Notes 6 reinvestment offer. Those
Westpac Capital Notes were subsequently redeemed by Westpac.
On 8 March 2019, being the optional redemption/transfer date of the Westpac Capital Notes, the remaining
$662 million of Westpac Capital Notes were transferred to the Westpac Capital Notes nominated party for $100
each. Those Westpac Capital Notes were subsequently redeemed by Westpac.
Adoption of new accounting standards
Adoption of AASB 9 and AASB 15
The Group adopted the classification and measurement, and impairment requirements of AASB 9: Financial
Instruments (AASB 9) on 1 October 2018. AASB 9 includes a forward looking 'expected credit loss' impairment
model, revised classification and measurement model and modifies the approach to hedge accounting.
2019 Interim financial report
Directors’ report
86 | Westpac Group 2019 Interim Financial Results Announcement
The adoption of AASB 9 reduced retained earnings at 1 October 2018 by $722 million (net of tax) primarily due to
the increase in impairment provisions under the new standard.
The Group adopted AASB 15: Revenue from Contracts with Customers (AASB 15) on 1 October 2018. AASB 15
provides a systematic approach to revenue recognition by introducing a five-step model governing revenue
measurement and recognition. The adoption of AASB 15 reduced retained earnings at 1 October 2018 by
$5 million (net of tax).
Further details of the changes from the adoption of AASB 9 and AASB 15 as well as details of accounting
standards that have been issued but are not yet effective for the Group are included in Note 1 in the 2019 Interim
Financial Report.
APRA regulatory changes and other changes affecting capital
APRA's proposed changes to capital standards
On 19 July 2017, APRA released an Information Paper titled 'Strengthening Banking System Resilience -
Establishing Unquestionably Strong Capital Ratios'. In its release, APRA concluded that the four major Australian
banks, including Westpac, need to have a CET1 ratio of at least 10.5%, as measured under the existing capital
framework, to be considered "unquestionably strong." Banks are expected to meet this new benchmark by
1 January 2020. APRA has indicated that it expects to finalise the suite of prudential standards to give effect to
"unquestionably strong" in 2020-21, with the revised prudential standards likely to come into effect from 2022,
consistent with the international timetable.
APRA has commenced consultation and has issued the following discussion papers:
• 'Revision to the Capital Framework for Authorised Deposit-Taking Institutions'. The discussion paper included
proposed revisions to the capital framework as well as other changes to better align the framework to risks,
including in relation to home lending. APRA has not yet determined the timeframe for proceeding with domestic
implementation of changes to market risk standards.
• 'Leverage Ratio Requirements for Authorised Deposit-Taking Institutions'. APRA has released draft prudential
and reporting standards. These papers propose to impose a minimum leverage ratio requirement of 3.5% for
ADIs that use the internal ratings-based approach to determine capital adequacy. APRA is proposing that the
minimum leverage ratio requirement will come into effect from 1 January 2022, compared to the original
proposed implementation date of 1 July 2019.
• 'Improving the transparency, comparability and flexibility of the ADI capital framework'. The discussion paper
outlines the options APRA is considering for the presentation of capital ratios, minimum capital requirements
and capital instrument triggers.
APRA has announced that its revisions to the capital framework are not intended to necessitate further capital
increases for the industry above the 10.5% benchmark. However, given the proposals include higher risk weights
for certain mortgage products, such as interest only loans and loans for investment purposes, the impact on
individual banks may vary. The proposals are currently under consultation and final details remain unclear, and it
is therefore too soon to determine the impact on Westpac.
Further details of Westpac's other regulatory disclosures required in accordance with prudential standard APS 330
can be accessed at https://www.westpac.com.au/about-westpac/investor-centre/financial-information/regulatory-
disclosures/.
Resolution planning including additional loss absorbing capacity and APRA's crisis management powers
In response to the Financial System Inquiry recommendations, the Australian Government agreed to further
reforms regarding crisis management and establishing a framework for minimum loss-absorbing and
recapitalisation capacity.
On 8 November 2018, APRA commenced consultation on a requirement for ADIs to maintain additional loss
absorbency for resolution and released a discussion paper entitled "Increasing the loss-absorbing capacity of ADIs
to support orderly resolution". The discussion paper proposed that the four Australian major banks (including
Westpac) increase their Total Capital requirements by four to five percentage points of risk weighted assets under
the current capital adequacy framework by 2023. Under this proposal, APRA noted that it anticipates that the bulk
of additional capital raised would be in the form of Tier 2 Capital. In a speech given by Pat Brennan, Executive
General Manager, Policy and Advice Division, on 19 March 2019, APRA acknowledged that its proposals remain
under consultation and that APRA is "thinking through options and gathering additional information."Given that the
proposals are not expected to be finalised until later in 2019, the final outcome for Westpac remains unclear.
APRA also intends to consult on a framework for recovery and resolution later in 2019, which will include further
details on resolution planning.
2019 Interim financial report
Directors’ report
Westpac Group 2019 Interim Financial Results Announcement | 87
APRA Prudential Standard APS 222: Associations with Related Entities
On 2 July 2018, APRA released a Discussion Paper and consultation draft in relation to prudential standard APS
222: Associations with Related Entities. The Discussion Paper proposes changes to the requirements for ADIs in
managing their risks from associations with related parties. The proposals are at consultation stage and final
details remain unclear. It is expected that once finalised, the framework will be implemented from 1 January 2020.
APRA Prudential Standard CPS 234: Information Security Management
On 7 November 2018, APRA released the new cross-industry prudential standard CPS 234: Information Security
Management. The compliance date for this standard is 1 July 2019. APRA announced that the proposed standard
is aimed at improving the ability of APRA-regulated entities to detect cyber adversaries and respond swiftly and
effectively in the event of a breach. Westpac continues to enhance its systems and processes to further mitigate
cybersecurity risks.
International developments affecting Westpac
Brexit
On 29 March 2017, the Prime Minister of the United Kingdom (UK) notified the European Council in accordance
with Article 50 of the Treaty on European Union of the UK's intention to withdraw from the European Union (EU),
triggering a two year period for the negotiation of the UK's withdrawal from the EU. While the negotiation period
has been extended, there continues to be uncertainty on the timing and process for the UK's withdrawal.
As Westpac's business and operations are based predominantly in Australia and New Zealand, the direct impact
of the UK's departure from the EU is unlikely to be material to Westpac. However, it remains difficult to predict the
impact that Brexit may have on financial markets, the global economy and the global financial services industry.
Westpac has contingency planning in place and has been active in dialogue with affected customers.
OTC derivatives reform
International regulatory reforms relating to over-the-counter (OTC) derivatives continue to be implemented across
the globe, with a current focus on initial margin and risk mitigation practices for non-centrally cleared derivatives.
Global initial margin requirements commenced on 1 September 2016. These requirements are being introduced in
phases until 1 September 2020 and work is underway within Westpac to meet a proposed September 2019
compliance date.
New Zealand
RBNZ - Revised Outsourcing Policy
On 19 September 2017, the RBNZ advised WNZL of changes to its conditions of registration that will give effect to
the RBNZ's revised Outsourcing Policy (BS11) (Revised Outsourcing Policy). Both the changes to the conditions
of registration and the Revised Outsourcing Policy came into effect on 1 October 2017 for all new outsourcing
arrangements. The Revised Outsourcing Policy sets out requirements that banks need to meet when outsourcing
particular functions and services, especially if the service provider is a related party of the bank.
WNZL must fully comply with the requirement to maintain a compendium of outsourcing arrangements by
30 September 2019 and must fully comply with the other aspects of the Revised Outsourcing Policy by
30 September 2022 including remediation of all outsourcing arrangements existing as at 1 October 2017. Work is
underway to comply with those requirements. As a result of complying with the Revised Outsourcing Policy, the
ongoing cost of operating the WNZL business will increase, in addition to the costs of implementing the changes.
RBNZ Capital Review
The RBNZ is undertaking a Bank Capital Adequacy Framework review on the quantum and makeup of bank
capital. The RBNZ has now made "in principle" decisions on the risk weighted assets framework, including the
introduction of dual reporting, a standardised methodology for operational risk, and capital floors to internal rating
models.
On 14 December 2018, the RBNZ released a consultation paper to seek the public's view on a proposal to
significantly increase the level of regulatory capital in the New Zealand system. In the paper, the RBNZ proposed
to set a Tier 1 capital requirement equal to 16% of risk weighted assets for banks deemed systemically important,
such as WNZL. The proposal of a Tier 1 ratio of 6% of risk weighted assets as a regulatory minimum is
unchanged, and of this no more than 1.5% or risk weighted assets can be contributed by Additional Tier 1 capital
or redeemable preference shares. The RBNZ have proposed a five year transition period.
2019 Interim financial report
Directors’ report
88 | Westpac Group 2019 Interim Financial Results Announcement
The proposed changes aim to further strengthen the NZ banking system to protect the economy and depositors
from bank failure. Meeting the RBNZ's proposed minimum 16% Tier 1 capital ratio would require a further
estimated NZ$3.5 - 4 billion of Tier 1 capital if applied at 31 March 2019 (assuming that its existing NZ$1.5 billion
Additional Tier 1 capital instrument is not eligible to meet future Tier 1 capital requirements). WNZL is already
strongly capitalised with a Tier 1 capital ratio of 14.5% at 31 March 2019. The deadline for submissions has been
extended to 17 May 2019.
Reform of the regulation of financial advice
In July 2016, the New Zealand Government announced plans for changes to the regime regulating financial
advice. The new regime is set out in the Financial Services Legislation Amendment Act 2019 which received Royal
Assent on 8 April 2019.
A Code of Conduct is expected to be approved in Q2 2019. There will be a 9 month period from the Code's
approval to initial implementation of the new regime, after which a 2-year safe harbour for competency
requirements will apply. Full implementation of the regime is expected in Quarter 1 or Quarter 2 2022.
RBNZ - Review under section 95 of the Reserve Bank of New Zealand Act 1989
On 15 November 2017, the RBNZ advised WNZL of changes to its conditions of registration resulting from a
review of its compliance with advanced internal rating based aspects of the RBNZ's 'Capital Adequacy Framework
(Internal Models Based Approach)’. The changes to WNZL's conditions of registration came into effect on
31 December 2017 and increase the minimum Total Capital ratio, Tier 1 Capital ratio and Common Equity Tier 1
Capital ratio of WNZL and its controlled entities by 2%. WNZL has also undertaken to the RBNZ to maintain the
Total Capital ratio of WNZL and its controlled entities above 15.1%. WNZL and its controlled entities retain an
appropriate amount of capital to comply with the increased minimum ratios. The RBNZ requires WNZL to
sufficiently address non-compliance issues by 30 June 2019. A remediation plan has been provided to the RBNZ.
WNZL is providing regular progress updates to the RBNZ.
Review of the Reserve Bank of New Zealand Act
In November 2017, the New Zealand Government announced it will undertake a review of the Reserve Bank of
New Zealand Act 1989 (Act) (RBNZ Review). The RBNZ Review aims to ensure the RBNZ's monetary and
financial policy framework still provides the most efficient and effective model for New Zealand. The RBNZ Review
will consist of two phases. Phase 1 focuses on whether the RBNZ's decision-making process for monetary policy
is robust, and the legislation for the recommended Phase 1 related changes to New Zealand's monetary policy
framework received royal assent on 20 December 2018, and came into force on 1 April 2019. The terms of
reference for Phase 2 were released in June 2018 and will consider the overarching objectives of the RBNZ's
institutional governance and decision-making, the macro-prudential framework, the current prudential supervision
model, trans-Tasman coordination, supervision and enforcement and resolution and crisis management. The first
consultation on Phase 2 closed in January 2019 and considered the overarching objectives of the RBNZ, the
RBNZ's governance and decision-making arrangements, prudential supervision and crisis management. Two
further subsequent Phase 2 consultations are planned. These will cover the detailed policy options developed
following the first consultation and the remaining terms of reference topics. At this stage, the first of these
subsequent consultations is expected to commence in the first half of 2019 with the final consultation expected
later in 2019.
Residential Mortgage Bond Collateral Standard Review
On 17 December 2017, the RBNZ published an issues paper proposing an enhanced mortgage bond standard
aimed at supporting confidence and liquidity in the financial system. Following industry engagement to develop a
new mortgage bond standard, the RBNZ released a consultation paper on the policy standard in November 2018.
The consultation closed in March 2019 and final decisions on the new mortgage bond standard are awaited. A
five-year transition to full implementation is proposed.
RBNZ/FMA - Financial Services Conduct & Culture Review
In May 2018, the RBNZ and FMA commenced a review in respect of New Zealand's 10 major banks & 15 life
insurers, including WNZL and Westpac Life-NZ-Limited, to explain why conduct issues highlighted by the
Australian Royal Commission are not present in New Zealand. WNZL and Westpac Life provided the regulators
with information in relation to this review. An industry thematic review report for the banks was released on
5 November 2018. The report identified no widespread instances of misconduct and notes that each bank will be
required to provide regulators with a plan by the end of March 2019 to address the issues identified in the report
and in the individualised letters that were received by the banks in November 2018.
The industry thematic review report into life insurers, including Westpac-Life-NZ-Limited, was released on
29 January 2019. The report identified extensive weaknesses in life insurers' systems and controls, governance
and management of conduct risks. Each insurer is required to provide regulators with a plan by the end of June
2019 to address the issues identified in the report and in individualised letters that were received by the insurers in
February 2019.
2019 Interim financial report
Directors’ report
Westpac Group 2019 Interim Financial Results Announcement | 89
Conduct of Financial Institutions Review
Following the developments and findings of the Financial Services Conduct & Culture Review and the Australian
Royal Commission, the Ministry of Business, Innovation & Employment (MBIE) published an options paper on
27 April 2019 which considers how the conduct of financial institutions could be better regulated. The options
outlined in the paper include the introduction of overarching duties to govern the conduct of financial institutions,
senior management and director accountability for breach of duties, a legal duty regarding the handling of
insurance claims, measures to address conflicted remuneration and product suitability measures. The paper also
outlines a range of enforcement measures. Submissions on the paper are due on 7 June 2019, with the intention
of introducing legislation to Parliament by the end of 2019.
Insurance Contracts Law Review
On 27 April 2019, the MBIE released an options paper as part of its insurance contract law review with the aim of
making insurance contracts fairer and clearer. The options outlined in the paper relate to information disclosure to
insurers (and remedies available for non-disclosure), removal of insurance-specific exemptions to unfair contract
terms of the Fair Trading Act 1986 and measures to enable insurers to understand and compare policies.
Submissions on the paper are due on 28 June 2019, with the intention of introducing legislation to Parliament by
mid-2019.
2019 Interim financial report
Directors’ report
90 | Westpac Group 2019 Interim Financial Results Announcement
Risk factors
Our business is subject to risks that can adversely impact our financial performance, financial condition and future
performance. If any of the following risks occur, our business, prospects, reputation, financial performance or
financial condition could be materially adversely affected, with the result that the trading price of our securities
could decline and as a security holder you could lose all, or part, of your investment. You should carefully consider
the risks described and the other information in this Results Announcement and in our 2018 Annual Report before
investing in our securities. The risks and uncertainties described below are not the only ones we face. Additional
risks and uncertainties that we are unaware of, or that we currently deem to be immaterial, may also become
important factors that affect us.
Risks relating to our business
Our businesses are highly regulated and we have been and could be adversely affected by changes in
laws, regulations or regulatory policy
As a financial institution, we are subject to detailed laws and regulations in each of the jurisdictions in which we
operate or obtain funding, including Australia, New Zealand, the United Kingdom, the United States and various
jurisdictions in Asia and the Pacific. We are also supervised by a number of different regulatory and supervisory
authorities which have broad administrative powers over our businesses.
The Group's business, prospects, reputation, financial performance and financial condition could all be affected by
changes to law and regulation, changes to policies and changes in the supervisory activities and expectations of
our regulators. The Group is currently operating in an environment where there is increased scrutiny of the
financial services sector. This has, in turn, led to increased scrutiny of financial services providers by regulators. In
this environment, the Group faces increasing supervision and regulation in the jurisdictions in which we operate or
obtain funding. This environment has also served to increase the pace and scope of regulatory change.
Regulatory change could directly and adversely affect the Group’s financial condition and financial position. In
recent years, new laws have required Westpac to maintain increased levels of liquidity and hold higher levels of,
and better quality, capital and funding. Regulatory change may continue in this area. Regulation also affects the
way we operate our business. New regulation could require us to change our existing business models (including
by imposing restrictions on the types of businesses we can conduct) or amend our corporate structure. The
competitive landscape may also be altered by new laws. For example, the phasing in of Open Banking could
change the competitive landscape for banks and financial services providers in Australia.
Recently, policy makers and regulators have developed and implemented a range of regulations that affect how
we provide products and services to our customers. New laws have been introduced that further regulate our
ability to provide products and services to certain customers and that require us to alter our product and service
offerings. Our ability to set prices for certain products and services may also be impacted by future regulation.
Regulatory change of this type could adversely affect one or more of our businesses, restrict our flexibility, require
us to incur substantial costs and could impact the profitability of one or more of our business lines. Any such costs
or restrictions could adversely affect our business, prospects, financial performance or financial condition.
There are numerous sources of regulatory change that could affect our business. In some cases, changes to
regulation are driven by international bodies, such as the Basel Committee on Banking Supervision (BCBS).
Regulatory change may also flow from reviews and inquiries commissioned by Governments or regulators. These
reviews and commissions of inquiry may lead to, and in some cases already have led to, substantial regulatory
change or investigations, which could have a material impact on our business, prospects, reputation, financial
performance or financial condition.
It is also possible that governments or regulators in jurisdictions in which we operate or obtain funding might revise
their application of existing regulatory policies that apply to, or impact, our business (including by instituting macro-
prudential limits on lending). Regulators or governments may take this action for a variety of reasons, including for
reasons relating to national interest and/or systemic stability.
Regulatory changes and the timing of their introduction continue to evolve and we manage our businesses in the
context of regulatory uncertainty and complexity. The nature and impact of future changes are not predictable and
are beyond our control. Regulatory compliance and the management of regulatory change are an important part of
our planning processes. We expect that we will continue to invest significantly in compliance and the management
and implementation of regulatory change and, at the same time, significant management attention and resources
will be required to update existing, or implement new, processes to comply with new regulations (such as
obligations to provide certain data and information to regulators) or new interpretations of existing laws or
regulations. The failure of the Group to appropriately manage and implement regulatory change, including by
failing to implement effective processes to comply with new regulations, could result in the Group failing to meet a
compliance obligation. Further information about the consequences of failing to meet a compliance obligation is
set out in the section titled ‘Our businesses are highly regulated and we have been or could be adversely affected
by failing to comply with laws, regulations or regulatory policy’ below.
2019 Interim financial report
Directors’ report
Westpac Group 2019 Interim Financial Results Announcement | 91
Another consideration in managing regulatory change arises when regulation is introduced in one jurisdiction that
conflicts with the way it is introduced in other jurisdictions in which we operate.
For further information about regulatory changes affecting the Group, refer to 'Significant developments' in this
2019 Interim Financial Report and in our 2018 Annual Report (specifically in ‘Significant Developments’ in Section
1 and the sections 'Critical accounting assumptions and estimates' and 'Future developments’ in Note 1 to the
financial statements).
Our businesses are highly regulated and we have been or could be adversely affected by failing to comply
with laws, regulations or regulatory policy
We are responsible for ensuring that we comply with all applicable legal and regulatory requirements and industry
codes of practice in the jurisdictions in which we operate or obtain funding, as well as meeting our ethical
standards.
The Group is subject to compliance risk, which is the risk of legal or regulatory sanction or financial or reputational
loss, arising from our failure to abide by the compliance obligations required of us. This risk is exacerbated by the
increasing complexity and volume of domestic and global regulation. Compliance risk can also arise where we
interpret our regulatory obligations, compliance requirements and rights differently to our regulators or a Court.
The potential for this to occur may be heightened in the period that follows the introduction of significant changes
to regulation, particularly where that new regulation is untested and/or not subject to extensive regulatory
guidance.
The Group employs a compliance management system which is designed to identify, assess and manage
compliance risk. This system includes (amongst other things) frameworks, policies, procedures, controls and
assurance oversight. While this system is currently in place, it may not always have been or continue to be
effective. Breakdowns may occur in this compliance management system due, for example, to flaws in the design
of controls or underlying processes. This has resulted in, and may in the future result in potential breaches of our
compliance obligations, as well as poor customer outcomes.
The Group also depends on its employees, contractors, agents, authorised representatives and external service
providers to 'do the right thing' for it to meet its compliance obligations. If an employee, contractor or external
service provider fails to act in an appropriate manner, such as by neglecting to follow a policy or by engaging in
misconduct, these actions could result in poor customer outcomes and a failure by the Group to comply with its
compliance obligations.
The Group's failure, or suspected failure, to comply with a compliance obligation could lead to a regulator
commencing surveillance or an investigation into the Group, which may, depending on the circumstances, result in
the regulator taking administrative or enforcement action against us (including seeking fines or other monetary
penalties). In addition, the failure or alleged failure of our competitors to comply with their compliance obligations
could lead to increased regulatory scrutiny across the financial services sector.
In many cases, our regulators have broad administrative and enforcement powers. For example, under the
Banking Act 1959 (Cth), APRA can, in certain circumstances, investigate our affairs and/or issue a direction to us
(such as a direction to comply with a prudential requirement, to conduct an audit, to remove a Director, executive
officer or employee, or not to undertake transactions), disqualify an 'Accountable Person' under the Banking and
Executive Accountability Regime or require us to hold additional capital. Other regulators also have the power to
investigate, including looking into past conduct.
The current political and regulatory environment that the Group is operating in has also seen (and may in the
future see) our regulators receive new powers. Recently, legislation has been passed by the Australian Parliament
that provides ASIC with a product intervention power. Under this power, ASIC can make product intervention
orders that prevent issuers of financial products from engaging in certain conduct. In addition, new legislation has
been passed that considerably strengthens the penalties that can be imposed for corporate and financial sector
misconduct. In particular, ASIC can now commence civil penalty proceedings (and seek significant civil penalties)
against an Australian Financial Services licensee (such as Westpac) for failing to do all things necessary to ensure
that financial services provided under the licence are provided efficiently, honestly and fairly.
Changes may also occur in the oversight approach of regulators, which could result in a regulator preferring its
enforcement powers over a more consultative approach. This dynamic is already apparent, with ASIC committing
to accelerating enforcement activities, conducting more civil and criminal enforcement actions against large
financial institutions and adopting a ‘why not litigate?’ enforcement stance. ASIC has also introduced its ‘Close and
Continuous Monitoring’ supervisory approach, which has seen ASIC staff being embedded within the institutions
they supervise, including Westpac. APRA has publicly committed to a revised approach to enforcement as well,
indicating that it will use enforcement where appropriate to prevent and address serious prudential risks and hold
entities and individuals to account. As part of this approach, APRA has indicated that it will consider taking public
enforcement action (such as issuing directions, imposing licence conditions or commencing Court proceedings) for
wider deterrence purposes. In recent years, there have been significant increases in the nature and scale of
regulatory investigations, enforcement actions and the quantum of fines issued by global regulators.
2019 Interim financial report
Directors’ report
92 | Westpac Group 2019 Interim Financial Results Announcement
The provision of new powers to regulators, coupled with the increasingly active supervisory and enforcement
approaches adopted by them, increases the prospect of adverse regulatory action being brought against the
Group. Further, the severity and consequences of that action are now greater, given the recent expansion of
penalties for corporate and financial sector misconduct.
Regulatory action brought against the Group may expose the Group to an increased risk of litigation brought by
third parties (including through class action proceedings). The outcome of such litigation (including class action
proceedings) may be payment of compensation to third parties and/or further remediation activities. In addition,
action taken in one jurisdiction may prompt similar action to be taken in another jurisdiction.
Regulatory investigations, inquiries, litigation, fines, penalties, infringement notices, revocation, suspension or
variation of conditions of relevant regulatory licences or other enforcement or administrative action or agreements
(such as enforceable undertakings) could, either individually or in aggregate with other regulatory action, adversely
affect our business, prospects, reputation, financial performance or financial condition. For further details about
regulatory matters that may affect the Group, refer to ‘Significant Developments’ in this 2019 Interim Financial
Report.
The failure to comply with financial crime obligations could have an adverse effect on our business and
reputation
The Group is subject to anti-money laundering and counter-terrorism financing (AML/CTF) laws, anti-bribery and
corruption laws, economic and trade sanctions laws and tax transparency laws in the jurisdictions in which it
operates. These laws can be complex and, in some circumstances, impose a diverse range of obligations. For
example, AML/CTF laws require Westpac and other regulated institutions to (amongst other things) undertake
customer identification and verification, conduct ongoing due diligence on customers, maintain and comply with an
AML/CTF program and undertake ongoing risk assessments. AML/CTF laws also require Westpac to report
certain matters and transactions to regulators (including in relation to International Funds Transfer Instructions,
Threshold Transaction Reports and Suspicious Matter Reports) and ensure that certain information is not
disclosed to third parties in a way that would contravene the ‘tipping off’ provisions in AML/CTF legislation.
Furthermore, financial crime laws are also undergoing change in a number of jurisdictions.
In recent years there has been increased focus on compliance with financial crime obligations, with regulators
around the globe commencing large-scale investigations and taking enforcement action where they have identified
non-compliance (often seeking significant monetary penalties). Further, due to the large volume of transactions
that the Group processes, the undetected failure or the ineffective implementation or remediation of a system,
policy, process or control (including in relation to a regulatory reporting obligation) could result in a significant
number of breaches of AML/CTF obligations and significant monetary penalties.
While the Group has systems, policies, processes and controls in place that are designed to manage its financial
crime obligations (including its reporting obligations), these may not always have been or continue to be effective,
with the Group currently working to address areas of control weaknesses in its financial crime management
framework. If we fail to comply with these obligations it could impact the ability of financial crime regulators and law
enforcement bodies to deal with and minimise financial crime, and we could face regulatory enforcement action
such as litigation, significant fines, penalties and the revocation, suspension or variation of licence conditions. Non-
compliance could also lead to litigation commenced by third parties (including class action proceedings) and cause
reputational damage. These actions could, either individually or in aggregate, adversely affect our business,
prospects, reputation, financial performance or financial condition.
Reputational damage could harm our business and prospects
Our ability to attract and retain customers and our prospects could be adversely affected if our reputation is
damaged.
Reputation risk is the risk of loss of reputation, stakeholder confidence or public trust and standing. It arises where
there are differences between stakeholders' current and emerging perceptions, beliefs and expectations and our
current and planned activities, processes, performance and behaviours.
There are various potential sources of reputational damage. Westpac's reputation may be damaged where any of
its policies, processes, practices or behaviours result in a negative outcome for a customer or a class of
customers. Other potential sources of reputational damage include the failure to effectively manage risks in
accordance with our risk management frameworks, failure to comply with legal and regulatory requirements,
adverse findings from regulatory reviews (including Westpac-specific and industry-wide reviews), environmental,
social and ethical issues, failure of information security systems, technology failures, security breaches and
inadequate record keeping which may prevent Westpac from demonstrating that a past decision was appropriate
at the time it was made.
2019 Interim financial report
Directors’ report
Westpac Group 2019 Interim Financial Results Announcement | 93
Westpac may suffer reputational damage where its conduct, practices, behaviours or business activities do not
align with the evolving standards and expectations of the community, our regulators and other stakeholders. As
these expectations may exceed the standard required in order to comply with the law, Westpac may incur
reputational damage even where it has met its legal obligations. Our reputation could also be adversely affected
by the actions of the financial services industry in general or from the actions of our competitors, customers,
suppliers, joint-venture partners, strategic partners and other counterparties.
Furthermore, the risk of reputational damage may be heightened by factors such as the increasing use of social
media or the increasing prevalence of groups which seek to publicly challenge the Group's strategy or approach to
aspects of its business.
Failure, or perceived failure, to appropriately address issues that could or do give rise to reputational risk could
also impact the regulatory change agenda, give rise to additional legal risk, subject us to regulatory investigations,
regulatory enforcement actions, fines and penalties or litigation brought by third parties (including class actions),
require us to remediate and compensate customers and incur remediation costs or harm our reputation among
customers, investors and the marketplace. This could lead to loss of business which could adversely affect our
business, prospects, financial performance or financial condition.
The Royal Commission has led to, and may continue to lead to, regulatory enforcement activity, litigation
and changes in laws, regulations or regulatory policy, and has resulted in, and may continue to result in,
ongoing reputational damage to the Group, all of which has and may continue to have an adverse effect
on our business and prospects
The Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry
investigated (amongst other things) whether any conduct, practices, behaviours or business activities engaged in
by financial services entities amounted to potential misconduct, or fell below community standards and
expectations.
These investigations (including the public hearings, submissions, evidence and findings of the Royal Commission)
had, and may continue to have, an adverse impact on the Group's reputation and potentially the financial
performance of the Group’s businesses. In addition, the Royal Commission’s findings have led to, and may
continue to lead in the future to, regulators commencing investigations and/or enforcement action against financial
institutions (including the Group). In this environment, there is also an increased risk of class actions or other
litigation being commenced by the Group’s customers, including in relation to matters raised at the Royal
Commission. For further information about this risk, refer to the section titled ‘We have and could suffer losses due
to litigation (including class action proceedings)’ below.
In addition, the recommendations made in the Final Report of the Commission (which was publicly released on
4 February 2019) has resulted and will, depending on how its recommendations are implemented, result in further
changes to legislation, and further influence the policies and practices of our regulators. In some instances, this
has already had, and may continue to have in the future, an adverse effect on our business, prospects, financial
performance or financial condition.
The Royal Commission has also lead to increased political or regulatory scrutiny of the financial industry in New
Zealand, and may continue to do so.
We have and could suffer losses due to litigation (including class action proceedings)
The Group (and individual entities within the Group) may, from time to time, be involved in legal proceedings,
regulatory actions or arbitration arising from the conduct of their business and the performance of their legal and
regulatory obligations.
Proceedings could be commenced against the Group by a range of potential plaintiffs, such as our customers,
shareholders, suppliers and counterparties. These plaintiffs may commence proceedings individually or they may
commence class action proceedings.
In recent years, there has been an increase in the number of class action proceedings brought against financial
services companies (and other organisations more broadly), many of which have resulted in significant monetary
settlements. The risk of class action proceedings being commenced is heightened by findings from regulatory
investigations or inquiries (such as the Royal Commission into Misconduct in the Financial Services Industry),
adverse media, an adverse judgment or the settlement of proceedings brought by a regulator. Furthermore, there
is a risk that class action proceedings commenced against a competitor could lead to similar class action
proceedings being commenced against the Group.
The growth in third party litigation funding in Australia has also contributed to a recent increase in the number of
class actions being commenced in Australia.
2019 Interim financial report
Directors’ report
94 | Westpac Group 2019 Interim Financial Results Announcement
From time to time, class action proceedings are commenced against the Group. For further information about
class actions proceedings that the Group is currently involved in, refer to Note 14 in this 2019 Interim Financial
Report.
Litigation (including class action proceedings) may, either individually or in aggregate, adversely affect the Group's
business, operations, prospects, reputation or financial condition. This risk is heightened by the recent increases in
the severity of penalties for certain breaches of the law. Such matters are subject to many uncertainties (for
example, the outcome may not be able to be predicted accurately). Furthermore, the Group's ability to respond to
and defend litigation may be adversely affected by inadequate record keeping.
Depending on the outcome of any litigation, the Group may be required to comply with broad Court orders,
including enforcement orders or otherwise pay money such as damages, fines, penalties or legal costs.
The Group's material contingent liabilities are described in Note 14 in this 2019 Interim Financial Report. There is a
risk that these contingent liabilities may be larger than anticipated or that additional litigation or other contingent
liabilities may arise, which could adversely affect our business, prospects, reputation, financial performance or
financial condition.
We could suffer information security risks, including cyberattacks
The proliferation of new technologies, the increasing use of the internet and telecommunications to conduct
financial transactions and the growing sophistication and activities of attackers (including organised crime and
state-sponsored actors) have resulted in increased information security risks for major financial institutions such as
Westpac and our external service providers.
While Westpac has systems in place to protect against, detect and respond to cyberattacks, these systems may
not always be effective and there can be no assurance that we will not suffer losses from cyberattacks or other
information security breaches in the future. If a cyberattack is successful, technology systems might fail to operate
properly or become disabled and it could result in the unauthorised release, gathering, monitoring, misuse, loss or
destruction of confidential, proprietary and other information of the Group, its employees, customers or third
parties or otherwise adversely impact network access, business operations or availability of services.
In addition, as cyber threats continue to evolve, we may be required to expend significant additional resources to
modify or enhance our systems or to investigate and remediate any vulnerabilities or incidents.
Our operations rely on the secure processing, storage and transmission of information on our computer systems
and networks, and the systems and networks of external suppliers. Although we implement measures to protect
the security, integrity and confidentiality of our information, there is a risk that the computer systems, software and
networks on which we rely may be subject to security breaches, unauthorised access, malicious software, external
attacks or internal breaches that could have an adverse impact on our confidential information or that of our
customers and counterparties.
Major banks in other jurisdictions have suffered security breaches from sophisticated cyberattacks. Our external
service providers or other parties that facilitate our business activities are also subject to the risk of cyberattacks.
Any such security breach could result in the loss of customers and business opportunities, significant disruption to
Westpac's operations, misappropriation of Westpac's confidential information and/or that of our customers and
damage to Westpac's computers or systems and/or those of our customers. Such a security breach could also
result in reputational damage, claims for compensation and regulatory investigations and penalties, which could
adversely affect our business, prospects, financial performance or financial condition.
Our risk and exposure to such threats remains heightened because of the evolving nature of technology,
Westpac's prominence within the financial services industry, the prominence of our customers (including
government, mining and health), increasing obligations to make data and information available to external third
parties and our plans to continue to improve and expand our internet and mobile banking infrastructure.
We could suffer losses due to technology failures or our inability to appropriately manage and upgrade
our technology
The reliability, integrity and security of our information and technology is crucial in supporting our customers'
banking requirements and meeting our compliance obligations and our regulators' expectations.
While the Group has a number of processes in place to provide for and monitor the availability and recovery of our
systems, there is a risk that our information and technology systems might fail to operate properly or become
disabled as a result of events that are wholly or partially beyond our control. If we incur a technology failure we
may fail to meet a compliance obligation (such as the obligation to retain records and data for requisite periods of
time), or our customers may be adversely affected. This could potentially result in reputational damage,
remediation costs and a regulator commencing an investigation and/or taking administrative or enforcement action
against us.
2019 Interim financial report
Directors’ report
Westpac Group 2019 Interim Financial Results Announcement | 95
Further, in order to continue to deliver new products and services to customers, comply with our regulatory
obligations (such as obligations to report certain data and information to regulators) and meet the ongoing
expectations of our regulators, we need to regularly renew and enhance our technology. We are constantly
managing technology projects including projects to consolidate technology platforms, simplify and enhance our
technology and operations environment, assist us to comply with legal obligations, improve productivity and
provide for a better customer experience. Failure to implement these projects or manage associated change
effectively could result in cost overruns, unrealised productivity, operational instability, failure to meet compliance
obligations and/or reputational damage. In turn, this could place us at a competitive disadvantage and adversely
affect our financial performance.
Adverse credit and capital market conditions or depositor preferences may significantly affect our ability
to meet funding and liquidity needs and may increase our cost of funding
We rely on deposits, and credit and capital markets, to fund our business and as a source of liquidity. Our liquidity
and costs of obtaining funding are related to credit and capital market conditions.
Global credit and capital markets can experience periods of extreme volatility, disruption and decreased liquidity
as was demonstrated during the Global Financial Crisis. While there have now been extended periods of stability
in these markets, the environment remains unpredictable. The main risks we face are damage to market
confidence, changes to the access and cost of funding and a slowing in global activity or other impacts on entities
with whom we do business. Capital markets may also be affected by proposed changes to US repatriation tax
rules.
As of 31 March 2019, approximately 31% of our total funding originated from domestic and international wholesale
markets. Of this, around 65% was sourced outside Australia and New Zealand. Customer deposits provide around
62% of total funding. Customer deposits held by Westpac are comprised of both term deposits which can be
withdrawn after a certain period of time and at call deposits which can be withdrawn at any time.
A shift in investment preferences could result in deposit withdrawals by customers which could increase our need
for funding from other, potentially less stable, or more expensive, forms of funding.
If market conditions deteriorate due to economic, financial, political or other reasons, there may also be a loss of
confidence in bank deposits and we could experience unexpected deposit withdrawals. In this situation our funding
costs may be adversely affected and our liquidity and our funding and lending activities may be constrained.
If our current sources of funding prove to be insufficient, we may be forced to seek alternative financing. The
availability of such alternative financing, and the terms on which it may be available, will depend on a variety of
factors, including prevailing market conditions, the availability of credit, our credit ratings and credit market
capacity. Even if available, these alternatives may be more expensive or on unfavourable terms, which could
adversely affect our financial performance, liquidity, capital resources or financial condition. There is no assurance
that we will be able to obtain adequate funding, do so at acceptable prices, or that we will be able to recover any
additional costs.
If Westpac is unable to source appropriate funding, we may also be forced to reduce our lending or begin selling
liquid securities. Such actions may adversely impact our business, prospects, liquidity, capital resources, financial
performance or financial condition. If Westpac is unable to source appropriate funding for an extended period, or if
it can no longer sell liquid securities, there is a risk that Westpac will be unable to pay its debts as and when they
become due and payable.
Westpac enters into collateralised derivative obligations, which may require Westpac to post additional collateral
based on movements in market rates, which has the potential to adversely affect Westpac's liquidity or ability to
use derivative obligations to hedge its interest rate, currency and other financial instrument risks.
For a more detailed description of liquidity risk, refer to 'Funding and liquidity risk' in Note 22 in our 2018 Annual
Report.
Sovereign risk may destabilise financial markets adversely
Sovereign risk is the risk that governments will default on their debt obligations, will be unable to refinance their
debts as they fall due or will nationalise parts of their economy including assets of financial institutions such as
Westpac. Sovereign defaults could negatively impact the value of our holdings of high quality liquid assets. There
may also be a cascading effect to other markets and countries, the consequences of which, while difficult to
predict, may be similar to or worse than those experienced during the Global Financial Crisis. Such an event could
destabilise global financial markets, adversely affecting our liquidity, financial performance or financial condition.
2019 Interim financial report
Directors’ report
96 | Westpac Group 2019 Interim Financial Results Announcement
Failure to maintain credit ratings could adversely affect our cost of funds, liquidity, competitive position
and access to capital markets
Credit ratings are independent opinions on our creditworthiness. Our credit ratings can affect the cost and
availability of our funding from capital markets and other funding sources and they may be important to customers
or counterparties when evaluating our products and services. Therefore, maintaining high credit ratings is
important.
The credit ratings assigned to us by rating agencies are based on an evaluation of a number of factors, including
our financial strength, the quality of our governance, structural considerations regarding the Australian financial
system and the credit rating of the Australian Government. A credit rating downgrade could be driven by a
downgrade of the Australian Government, the occurrence of one or more of the other risks identified in this section
or by other events including changes to the methodologies used by the rating agencies to determine ratings.
A downgrade or series of downgrades to our credit ratings could have an adverse effect on our cost of funds and
related margins, collateral requirements, liquidity, competitive position and our access to capital markets. The
extent and nature of these impacts would depend on various factors, including the extent of any ratings change,
whether our ratings differ among agencies (split ratings) and whether any ratings changes also impact our
competitors or the sector.
A systemic shock in relation to the Australian, New Zealand or other financial systems could have adverse
consequences for Westpac or its customers or counterparties that would be difficult to predict and
respond to
There is a risk that a major systemic shock could occur that causes an adverse impact on the Australian, New
Zealand or other financial systems.
As outlined above, during the past decade the financial services industry and capital markets have been, and may
continue to be, adversely affected by market volatility, global economic conditions, geopolitical instability (such as
threats of or actual conflict occurring around the world) and political developments. In particular, there have been
significant global political developments in recent times, including Brexit and the introduction of tariffs and other
protectionist measures by various countries, such as the US and China. A shock to one of the major global
economies could again result in currency and interest rate fluctuations and operational disruptions that negatively
impact the Group.
Any such market and economic disruptions could adversely affect financial institutions such as Westpac because
consumer and business spending may decrease, unemployment may rise and demand for the products and
services we provide may decline, thereby reducing our earnings. These conditions may also affect the ability of our
borrowers to repay their loans or our counterparties to meet their obligations, causing us to incur higher credit
losses and affect investors' willingness to invest in the Group. These events could also result in the undermining of
confidence in the financial system, reducing liquidity, impairing our access to funding and impairing our customers
and counterparties and their businesses. If this were to occur, our business, prospects, financial performance or
financial condition could be adversely affected.
The nature and consequences of any such event are difficult to predict and there can be no certainty that we could
respond effectively to any such event.
Declines in asset markets could adversely affect our operations or profitability
Declines in Australian, New Zealand or other asset markets, including equity, residential and commercial property
and other asset markets, could adversely affect our operations and profitability.
Declining asset prices also impact our wealth management business. Earnings in our wealth management
business are, in part, dependent on asset values because we typically receive fees based on the value of
securities and/or assets held or managed. A decline in asset prices could negatively impact the earnings of this
business.
Declining asset prices could also impact customers and counterparties and the value of security (including
residential and commercial property) we hold against loans and derivatives. This may impact our ability to recover
amounts owing to us if customers or counterparties were to default. It may also affect our level of provisioning
which in turn impacts our profitability and financial condition.
Our business is substantially dependent on the Australian and New Zealand economies
Our revenues and earnings are dependent on economic activity and the level of financial services our customers
require. In particular, lending is dependent on various factors including economic growth, business investment,
business and consumer sentiment, levels of employment, interest rates, asset prices and trade flows in the
countries in which we operate.
2019 Interim financial report
Directors’ report
Westpac Group 2019 Interim Financial Results Announcement | 97
We conduct the majority of our business in Australia and New Zealand and, consequently, our performance is
influenced by the level and cyclical nature of lending in these countries. These factors are in turn impacted by both
domestic and international economic conditions, natural disasters and political events. A significant decrease in
Australian and New Zealand housing valuations could adversely impact our home lending activities because
borrowers with loans in excess of their property value show a higher propensity to default. In the event of defaults
our security may be eroded, causing us to incur higher credit losses. The demand for our home lending products
may also decline due to adverse changes in tax legislation (such as changes to tax rates, concessions or
deductions), regulatory requirements or other buyer concerns about decreases in values.
Adverse changes to economic and business conditions in Australia and New Zealand and other countries such as
China, India and Japan, could also adversely affect the Australian economy and our customers. In particular, due
to the current economic relationship between Australia and China, particularly in the mining and resources sectors,
a slowdown in China's economic growth, including as the result of the implementation of tariffs or other
protectionist trade measures, could negatively impact the Australian economy. Changes in commodity prices,
Chinese government policies and broader economic conditions could, in turn, result in reduced demand for our
products and services and affect the ability of our borrowers to repay their loans. If this were to occur, it could
negatively impact our business, prospects, financial performance or financial condition.
An increase in defaults in credit exposures could adversely affect our liquidity, capital resources, financial
performance or financial condition
Credit risk is the risk of financial loss where a customer or counterparty fails to meet their financial obligations to
Westpac. It is a significant risk and arises primarily from our lending activities.
We establish provisions for credit impairment based on current information and our expectations. If economic
conditions deteriorate outside of our expectations, some customers and/or counterparties could experience higher
levels of financial stress and we may experience a significant increase in defaults and write-offs, and be required
to increase our provisioning. Such events would diminish available capital and could adversely affect our liquidity,
capital resources, financial performance or financial condition.
Credit risk also arises from certain derivative, clearing and settlement contracts we enter into, and from our
dealings with, and holdings of, debt securities issued by other banks, financial institutions, companies, clearing
houses, governments and government bodies, the financial conditions of which may be affected to varying
degrees by economic conditions in global financial markets.
For a discussion of our risk management procedures, including the management of credit risk, refer to the 'Risk
management' section and Note 22 in our 2018 Annual Report.
We face intense competition in all aspects of our business
The financial services industry is highly competitive. We compete, both domestically and internationally, with retail
and commercial banks, asset managers, investment banking firms, brokerage firms, other financial service firms
and businesses in other industries with emerging financial services aspirations. This includes specialist
competitors that may not be subject to the same capital and regulatory requirements and therefore may be able to
operate more efficiently. Digital technologies are changing consumer behaviour and the competitive environment.
The use of digital channels by customers to conduct their banking continues to rise and emerging competitors are
increasingly utilising new technologies and seeking to disrupt existing business models, including in relation to
digital payment services. The Group faces competition from established providers of financial services as well as
from banking businesses developed by non-financial services companies.
The competitive environment may also change as a result of legislative reforms.
If we are unable to compete effectively in our various businesses and markets, our market share may decline.
Increased competition may also adversely affect us by diverting business to our competitors or creating pressure
to lower margins and fees.
Increased competition for deposits could also increase our cost of funding and lead us to seek access to other
types of funding or reduce lending. We rely on bank deposits to fund a significant portion of our balance sheet and
deposits have been a relatively stable source of funding. We compete with banks and other financial services firms
for such deposits. To the extent that we are not able to successfully compete for deposits, we would be forced to
rely more heavily on other, potentially less stable or more expensive forms of funding, or reduce lending.
We are also dependent on our ability to offer products and services that match evolving customer preferences. If
we are not successful in developing or introducing new products and services or responding or adapting to
changes in customer preferences and habits, we may lose customers to our competitors. This could adversely
affect our business, prospects, financial performance or financial condition.
For more detail on how we address competitive pressures refer to 'Competition' in Section 1 of our 2018 Annual
Report.
2019 Interim financial report
Directors’ report
98 | Westpac Group 2019 Interim Financial Results Announcement
We could suffer losses due to market volatility
We are exposed to market risk as a consequence of our trading activities in financial markets, our defined benefit
plan and through the asset and liability management of our financial position. This is the risk of an adverse impact
on earnings resulting from changes in market factors, such as foreign exchange rates, commodity prices, equity
prices, and interest rates including the potential for negative interest rates. This includes interest rate risk in the
banking book, such as the risk to interest income from a mismatch between the duration of assets and liabilities
that arises in the normal course of business activities.
Changes in market factors could be driven by a number of developments. As an example, in July 2017, the FCA
which regulates the London Interbank Offered Rate (“LIBOR”), announced that it would not require panel banks to
continue to submit rates for the calculation of the LIBOR benchmark after 2021. Accordingly, the continuation of
LIBOR in its current form will not be guaranteed after 2021, and it appears likely that LIBOR will be discontinued or
modified by 2021. Any such developments or future changes in the administration of LIBOR or any other
benchmarks could result in adverse consequences to the return on, value of and market for securities and other
instruments whose returns are linked to any such benchmark, including those securities or other instruments
issued by the Group.
If we were to suffer substantial losses due to any market volatility (including changes in the return on, value of or
market for, securities or other instruments) it may adversely affect our business, prospects, liquidity, capital
resources, financial performance or financial condition. For a discussion of our risk management procedures,
including the management of market risk, refer to the 'Risk management' section in our 2018 Annual Report.
We have and could suffer losses due to operational risks
Operational risk is the risk of loss resulting from inadequate or failed internal processes, people and systems or
from external events. It also includes, among other things, reputational risk, technology risk, model risk and
outsourcing risk, as well as the risk of business disruption due to external events such as natural disasters,
environmental hazard, damage to critical utilities, and targeted activism and protest activity. While we have
policies, processes and controls in place to manage these risks, these may not always have been, or continue to
be effective.
Ineffective processes and controls have resulted in, and could in the future result in an adverse outcome for
Westpac's customers. For example, a process breakdown could result in a customer not receiving a product on
the terms and conditions, or at the pricing, they agreed to. In addition, inadequate record keeping may prevent,
Westpac from demonstrating that a past decision was appropriate at the time it was made or that a particular
action or activity was undertaken. If this was to occur, Westpac may incur significant costs in paying refunds and
compensation to customers, as well as remediating any underlying process breakdown. These types of failure may
also result in increased regulatory scrutiny, with a regulator potentially commencing an investigation and/or taking
other enforcement, administrative or supervisory action.
We could incur losses from fraudulent applications for loans or from incorrect or fraudulent payments and
settlements, particularly real-time payments. Fraudulent conduct can also emerge from external parties seeking to
access the bank's systems and customers' accounts. If systems, procedures and protocols for managing fraud fail,
or are ineffective, they could lead to losses which could adversely affect our customers, as well as our business,
prospects, reputation, financial performance or financial condition.
Accurate and complete data is critical to ensure that Westpac's systems (both customer facing and back-office),
risk management frameworks, and financial reporting processes operate effectively. Poor data quality could arise
in a number of ways, including through inadequacies in systems, processes and policies, which could lead to
deficiencies or failings in customer service, risk management, financial reporting (including in the calculation of risk
weighted assets), compliance with legal obligations (including obligations to provide data to regulators) and also
result in poor decision making. Poor data quality, including as a result of data that is fragmented across multiple
systems, could affect the ability of Westpac to improve systems and processes. Westpac is also exposed to model
risk, being the risk of loss arising from errors or inadequacies in data or a model, or in the control and use of a
model.
Westpac is required to retain and access data and documentation for specific retention periods in order to satisfy
its compliance obligations. In some cases, Westpac also retains data to enable it to demonstrate that a past
decision was appropriate at the time it was made. Failings in systems, processes and policies could all adversely
affect Westpac's ability to retain and access data.
In recent times, financial services entities have been increasingly sharing data with third parties, such as suppliers
and regulators (both domestic and offshore), in order to conduct their business activities and meet regulatory
obligations. A breakdown in a process or control related to the transfer, storage or protection of data transferred to
a third party, or the failure of a third party to use and handle this data correctly, could result in the Group failing to
meet a compliance obligation and/or have an adverse impact on our customers and the Group.
2019 Interim financial report
Directors’ report
Westpac Group 2019 Interim Financial Results Announcement | 99
Westpac also relies on a number of suppliers, both in Australia and overseas, to provide services to it and its
customers. Failure by these suppliers to deliver services as required could disrupt services and adversely impact
Westpac's operations, profitability or reputation.
Operational risks can directly impact our reputation and result in financial losses (including through decreased
demand for our products and services) which would adversely affect our financial performance or financial
condition.
For a discussion of our risk management procedures, including the management of operational risk, refer to the
'Risk management' section in our 2018 Annual Report.
Operational risk, technology risk, conduct risk or compliance risk events have required, and could in the
future require, Westpac to undertake customer remediation activity
Westpac relies on a large number of policies, processes, procedures, systems and people to conduct its business.
Breakdowns or deficiencies in one of these areas (arising from one or more operational risk, technology risk,
conduct risk or compliance risk events) have resulted, and could in the future result in, adverse outcomes for
customers which Westpac is required to remediate.
These events would require the Group to incur significant remediation costs (which may include compensation
payments to customers and costs associated with correcting the underlying issue) and result in reputational
damage.
There are significant challenges and risks involved in executing a customer remediation activity. Westpac’s ability
to investigate an adverse customer outcome that may require remediation could be impeded if the issue is a
legacy matter spanning beyond our record retention period, or if our record keeping is otherwise inadequate.
Depending on the nature of the issue, it may be difficult to quantify and scope the remediation activity.
Determining how to properly and fairly compensate customers can also be a complicated exercise involving
numerous stakeholders, such as the affected customers, regulators and industry bodies. The Group’s proposed
approach to a remediation may be affected by a number of events, such as a group of affected customers
commencing class action proceedings on behalf of the broader population of affected customers, or a regulator
exercising their powers to require that a particular approach to remediation be taken. These factors could impact
the timeframe for completing the remediation activity, potentially resulting in Westpac failing to execute the
remediation in a timely manner. A failure of this type could lead to a regulator commencing enforcement action
against the Group. The ineffective or slow completion of a remediation also exposes the Group to reputational
damage, with the Group potentially being criticised by regulators, affected customers, the media and other
stakeholders, resulting in reputational damage.
The significant challenges and risks involved in scoping and executing remediations in a timely way also create the
potential for remediation costs actually incurred to be higher than those initially estimated by the Group.
If the Group cannot effectively scope, quantify or implement a remediation activity in a timely way, there could be a
negative impact on our business, prospects, reputation, financial performance or financial condition.
We have and could suffer losses due to conduct risk
Conduct risk is the risk that our provision of services and products results in unsuitable or unfair outcomes for our
stakeholders or undermines market integrity. Conduct risk could occur through the provision of products and
services to our customers that do not meet their needs or do not support market integrity, as well as the poor
conduct of our employees, contractors, agents, authorised representatives and external service providers. This
could occur through a failure to meet professional obligations to specific clients (including fiduciary and suitability
requirements), poor product design and implementation, failure to adequately consider customer needs or selling
products and services outside of customer target markets. Conduct risk may also arise where there has been a
failure to adequately provide a product or services that we had agreed to provide a customer.
While we have frameworks, policies, processes and controls that are designed to manage poor conduct outcomes,
these policies and processes may not always have been or continue to be effective. The failure of these policies
and processes could result in financial losses and reputational damage and this could adversely affect our
business, prospects, financial performance or financial condition.
We could suffer losses and our business could be adversely affected by the failure to adopt and
implement appropriate risk management
We have implemented risk management strategies, frameworks and internal controls involving processes and
procedures intended to identify, monitor and manage risks facing the Group.
However, there are inherent limitations with any risk management framework as there may exist, or emerge in the
future, risks that we have not anticipated or identified and controls may not be effective.
2019 Interim financial report
Directors’ report
100 | Westpac Group 2019 Interim Financial Results Announcement
As part of the Group’s risk management framework, the Group measures and monitors risks against its risk
appetite. Where the Group identifies a risk as being out-of-appetite, the Group needs to take steps to bring this risk
back into appetite in a timely way. However, there may be circumstances where the Group fails to achieve this.
This could be because, for example, the Group is unable to enhance its information technology systems to better
manage the out-of-appetite risk, is unable to recruit appropriately trained risk management staff or because the
relevant risk class is, due to external factors beyond the Group’s control, inherently outside of appetite. The Group
is also required to periodically review its risk management framework to determine whether it remains appropriate.
If the Group is unable to bring risks back into appetite, or if it is determined that the Group’s risk management
framework is no longer appropriate, the Group may incur unexpected losses and be required to undertake
considerable remedial work. The failure to remedy this situation could potentially result in increased scrutiny from
regulators, who could take supervisory action such as requiring the Group to hold additional capital or directing the
Group to spend money to enhance its’ risk management systems and controls. Inadequacies in addressing risks
or in the Group’s risk management framework could also result in the Group failing to meet a compliance
obligation and/or financial losses.
The effectiveness of risk management frameworks is also connected to the establishment and maintenance of a
sound risk management culture. The development of appropriate remuneration structures can play an important
role in supporting the establishment of, and contributing to the maintenance, of a sound risk culture. However, if
there is a deficiency in the design or operation of our remuneration structures, this could have a negative effect on
our risk culture. This could occur in circumstances where variable reward structures encourage excessive risk
taking or other conduct inconsistent with a sound risk culture. This, in turn, may have an adverse impact on the
effectiveness of our risk management frameworks.
If any of our governance or risk management processes and procedures prove ineffective or inadequate or are
otherwise not appropriately implemented, we could suffer unexpected losses and reputational damage which could
adversely affect our business, prospects, financial performance or financial condition.
For a discussion of our risk management procedures, refer to the 'Risk management' section in our 2018 Annual
Report.
The Group's failure to recruit and retain key executives, employees and Directors may have adverse
effects on our business
Key executives, employees and Directors play an integral role in the operation of Westpac's business and its
pursuit of its strategic objectives. The unexpected departure of an individual in a key role, or the Group's failure to
recruit and retain appropriately skilled and qualified persons into these roles, could each have an adverse effect on
our business, prospects, reputation, financial performance or financial condition.
Climate change may have adverse effects on our business
We, our customers and external suppliers, may be adversely affected by the physical risks of climate change,
including increases in temperatures, sea levels, and the frequency and severity of adverse climatic events
including fires, storms, floods and droughts. These effects, whether acute or chronic in nature, may directly impact
us and our customers through reputational damage, environmental factors, insurance risk and business disruption
and may have an adverse impact on financial performance (including through an increase in defaults in credit
exposures).
Initiatives to mitigate or respond to adverse impacts of climate change may impact market and asset prices,
economic activity, and customer behaviour, particularly in geographic locations and industry sectors adversely
affected by these changes. Failure to effectively manage these transition risks could adversely affect our business,
prospects, reputation, financial performance or financial condition.
We could suffer losses due to environmental factors
We and our customers operate businesses and hold assets in a diverse range of geographic locations. Any
significant environmental change or external event (including fire, storm, flood, earthquake, pandemic, civil unrest
or terrorism) in any of these locations has the potential to disrupt business activities, impact on our operations,
damage property and otherwise affect the value of assets held in the affected locations and our ability to recover
amounts owing to us. In addition, such an event could have an adverse impact on economic activity, consumer
and investor confidence, or the levels of volatility in financial markets, all of which could adversely affect our
business, prospects, financial performance or financial condition.
We could suffer losses due to insurance risk
We have exposure to insurance risk in our life insurance, general insurance and lenders mortgage insurance
businesses, which may adversely affect our business, operations or financial condition.
2019 Interim financial report
Directors’ report
Westpac Group 2019 Interim Financial Results Announcement | 101
Insurance risk is the risk in our licensed regulated insurance entities of the costs of claims being greater than
expected due to a failure in product design, underwriting, reinsurance arrangements or an increase in the severity
and/or frequency of insured events.
In the life insurance business, risk arises primarily through mortality (death) and morbidity (illness and injury) risks,
the costs of claims relating to those risks being greater than was anticipated when pricing those risks and policy
lapses.
In the general insurance business, insurance risk arises mainly through environmental factors (including storms,
floods and bushfires) and other calamities, such as earthquakes, tsunamis and volcanic activity, as well as general
variability in home and contents insurance claim amounts. The frequency and severity of external events such as
natural disasters is difficult to predict and it is possible that the amounts we reserve for potential losses from
existing events, such as those arising from natural disaster events, may not be adequate to cover actual claims
that may arise.
In the lenders mortgage insurance business, insurance risk arises primarily from unexpected downturns in
economic conditions leading to higher levels of mortgage defaults from unemployment or other economic factors.
If our reinsurance arrangements are ineffective, this could lead to greater risk, and more losses than anticipated.
There is also a risk that we will not be able to renew an expiring reinsurance arrangement on similar terms,
including in relation to the cost, duration and amount of reinsurance cover provided under that arrangement.
Changes in critical accounting estimates and judgements could expose the Group to losses
The Group is required to make estimates, assumptions and judgements when applying accounting policies and
preparing its financial statements, particularly in connection with the calculation of provisions (including those
related to remediations or credit losses) and the determination of the fair value of financial instruments. A change
in a critical accounting estimate, assumption and/or judgement resulting from new information or from changes in
circumstances or experience could result in the Group incurring losses greater than those anticipated or provided
for. This may have an adverse effect on the Group's financial performance, financial condition and reputation. The
Group's financial performance and financial condition may also be impacted by changes to accounting standards
or to generally accepted accounting principles.
We could suffer losses due to impairment of capitalised software, goodwill and other intangible assets
that may adversely affect our business, operations or financial condition
In certain circumstances Westpac may be exposed to a reduction in the value of intangible assets. As at
31 March 2019, Westpac carried goodwill principally related to its investments in Australia, other intangible assets
principally relating to assets recognised on acquisition of subsidiaries and capitalised software balances.
Westpac is required to assess the recoverability of the goodwill and other intangible asset balances on at least an
annual basis or wherever an indicator of impairment exists. For this purpose, Westpac uses a discounted cash
flow calculation. Changes in the methodology or assumptions upon which the calculation is based, together with
expected changes in future cash flows, could materially impact this assessment, resulting in the potential write-off
of part or all of the intangible assets.
In the event that an asset is no longer in use, or its value has been reduced or that its estimated useful life has
declined, an impairment will be recorded, adversely impacting the Group's financial condition. The estimates and
assumptions used in assessing the useful life of an asset can be affected by a range of factors including changes
in strategy and the rate of external changes in technology and regulatory requirements.
We could suffer losses if we fail to syndicate or sell down underwritten securities
As a financial intermediary, we underwrite listed and unlisted debt and equity securities. Underwriting activities
include the development of solutions for corporate and institutional customers who need capital and investor
customers who have an appetite for certain investment products. We may guarantee the pricing and placement of
these facilities. We could suffer losses if we fail to syndicate or sell down our risk to other market participants. This
risk is more pronounced in times of heightened market volatility.
Certain strategic decisions may have adverse effects on our business
Westpac, at times, evaluates and may implement strategic decisions and objectives including diversification,
innovation, divestment or business expansion initiatives.
The expansion or integration of a new business, or entry into a new business, can be complex and costly and may
require Westpac to comply with additional local or foreign regulatory requirements which may carry additional
risks.
2019 Interim financial report
Directors’ report
102 | Westpac Group 2019 Interim Financial Results Announcement
Westpac also acquires and invests in businesses owned and operated by external parties. These transactions
involve a number of risks for the Group. For example, Westpac may incur financial losses if a business it invests in
does not perform as anticipated or subsequently proves to be overvalued at the time that the transaction was
entered into.
In addition, we may be unable to successfully divest businesses or assets. These activities may, for a variety of
reasons, not deliver the anticipated positive business results and could have a negative impact on our business,
prospects, reputation, engagement with regulators, financial performance or financial condition.
Rounding of amounts
ASIC Corporations (Rounding in Financial/Directors’ Reports) Instrument 2016/191 applies to Westpac and in
accordance with that Legislative Instrument all amounts have been rounded to the nearest million dollars unless
otherwise stated.
2019 Interim financial report
Directors’ report
Westpac Group 2019 Interim Financial Results Announcement | 103
Auditor’s independence declaration
Following is a copy of the auditor’s independence declaration as required under Section 307C of the Corporations
Act 2001.
Auditor’s Independence Declaration
As lead auditor for the review of Westpac Banking Corporation for the half-year ended 31 March 2019, I declare
that to the best of my knowledge and belief, there have been:
(a) no contraventions of the auditor independence requirements of the Corporations Act 2001 in relation to the
review; and
(b) no contraventions of any applicable code of professional conduct in relation to the review.
This declaration is in respect of Westpac Banking Corporation and the entities it controlled during the period.
Lona Mathis
Sydney
Partner
PricewaterhouseCoopers
6 May 2019
PricewaterhouseCoopers, ABN 52 780 433 757
One International Towers Sydney, Watermans Quay, Barangaroo, GPO BOX 2650, SYDNEY NSW 2001
T: +61 2 8266 0000, F: +61 2 8266 9999, www.pwc.com.au
Liability limited by a scheme approved under Professional Standards Legislation.
2019 Interim financial report
Directors’ report
104 | Westpac Group 2019 Interim Financial Results Announcement
Responsibility statement
The Directors of Westpac Banking Corporation confirm that to the best of their knowledge:
(i) the interim financial statements have been prepared in accordance with AASB 134 Interim Financial Reporting
and are in compliance with IAS 34 Interim Financial Reporting issued by the International Accounting
Standards Board; and
(ii) the Directors’ Report includes a fair review of the information required by DTR 4.2.7 R of the Disclosure
Guidance and Transparency Rules of the United Kingdom Financial Conduct Authority.
Signed in accordance with a resolution of the Board of Directors.
Lindsay Maxsted
Chairman
Brian Hartzer
Managing Director and
Chief Executive Officer
Sydney, Australia
6 May 2019
2019 Interim financial report
Consolidated financial statements
Westpac Group 2019 Interim Financial Results Announcement | 105
4.2 Consolidated income statement
1
for the half year ended 31 March 2019
Westpac Banking Corporation and its controlled entities
% Mov't % Mov't
Half Year Half Year Half Year Mar 19 - Mar 19 -
$m Note March 19 Sept 18 March 18 Sept 18 Mar 18
Interest income 3 16,968 16,481 16,090 3 5
Interest expense 3 (8,705) (8,254) (7,812) 5 11
Net interest income 8,263 8,227 8,278
- -
Net fee income 4 826 1,146 1,278 (28) (35)
Net wealth management and insurance income 4 326 1,110 951 (71) (66)
Trading income 4 437 458 487 (5) (10)
Other income 4 127 (17) 89 large 43
Net operating income before
operating expenses and impairment charges 9,979 10,924 11,083
(9) (10)
Operating expenses 5 (5,091) (4,911) (4,655) 4 9
Impairment charges 10 (333) (317) (393) 5 (15)
Profit before income tax
4,555 5,696 6,035
(20) (25)
Income tax expense 6 (1,379) (1,797) (1,835) (23) (25)
Net profit for the period
3,176 3,899 4,200
(19) (24)
Net profit attributable to non-controlling interests (3) (2) (2) 50 50
Net profit attributable to owners of
Westpac Banking Corporation
3,173 3,897 4,198
(19) (24)
Earnings per share (cents)
Basic 7 92.3 113.8 123.7 (19) (25)
Diluted 7 89.5 110.0 119.7 (19) (25)
The above consolidated income statement should be read in conjunction with the accompanying notes.
1
The Group has adopted AASB 9 Financial Instruments and AASB 15 Revenue from Contracts with Customers from 1 October 2018.
Statutory comparatives have not been restated. Refer to Note 1 in Section 4 for further detail. However, where applicable, cash
earnings comparatives (excluding expected credit loss provisioning) have been restated to aid comparability. Refer to the cash
earnings policy in Section 1.3.4 for further detail. In addition, during First Half 2019, the Group has made a number of presentational
changes to the Balance Sheet and Income Statement. Both statutory and cash earnings comparatives have been restated. Refer to
Note 1 in Section 4 for further detail.
2019 Interim financial report
Consolidated financial statements
106 | Westpac Group 2019 Interim Financial Results Announcement
4.3 Consolidated statement of comprehensive income
1
for the half year ended 31 March 2019
Westpac Banking Corporation and its controlled entities
% Mov't % Mov't
Half Year Half Year Half Year Mar 19 - Mar 19 -
$m March 19 Sept 18 March 18 Sept 18 Mar 18
Net profit for the period 3,176 3,899 4,200
(19) (24)
Other comprehensive income
Items that may be reclassified subsequently
to profit or loss
Gains/(losses) recognised in equity on:
Available-for-sale securities - (69) (33) n/a n/a
Debt securities measured at fair value through other
comprehensive income (FVOCI) 65 - - n/a n/a
Cash flow hedging instruments (192) (96) (65) 100 195
Transferred to income statement
Available-for-sale securities - 75 (9) n/a n/a
Debt securities measured at FVOCI (25) - - n/a n/a
Cash flow hedging instruments 80 109 94 (27) (15)
Foreign currency translation reserve (10) - (3) - large
Exchange differences on translation of foreign operations 55 143 38 (62) 45
Income tax on items taken to or transferred from equity:
Available-for-sale securities reserve - (4) 13 n/a n/a
Debt securities measured at FVOCI (14) - - n/a n/a
Cash flow hedge reserve 33 (4) (9) large large
Items that will not be reclassified subsequently
to profit or loss
Gains/(losses) on equity securities measured at FVOCI 1 - - n/a n/a
Own credit adjustment on financial liabilities designated
at fair value (2) 19 24 large large
Remeasurement of defined benefit obligation (151) 58 (13) large large
Other comprehensive income for the period (net of tax) (160) 231 37
large large
Total comprehensive income for the period 3,016 4,130 4,237
(27) (29)
Attributable to:
Owners of Westpac Banking Corporation 3,012 4,128 4,235 (27) (29)
Non-controlling interests 4 2 2 100 100
Total comprehensive income for the period 3,016 4,130 4,237
(27) (29)
The above consolidated statement of comprehensive income should be read in conjunction with the accompanying
notes.
1
The Group has adopted AASB 9 Financial Instruments and AASB 15 Revenue from Contracts with Customers from 1 October 2018.
Statutory comparatives have not been restated. Refer to Note 1 in Section 4 for further detail. However, where applicable, cash
earnings comparatives (excluding expected credit loss provisioning) have been restated to aid comparability. Refer to the cash
earnings policy in Section 1.3.4 for further detail. In addition, during First Half 2019, the Group has made a number of presentational
changes to the Balance Sheet and Income Statement. Both statutory and cash earnings comparatives have been restated. Refer to
Note 1 in Section 4 for further detail.
2019 Interim financial report
Consolidated financial statements
Westpac Group 2019 Interim Financial Results Announcement | 107
4.4 Consolidated balance sheet
1
as at 31 March 2019
Westpac Banking Corporation and its controlled entities
As at
As at
As at
% Mov't % Mov't
31 March 30 Sept 31 March Mar 19 - Mar 19 -
$m Note 2019 2018 2018 Sept 18 Mar 18
Assets
Cash and balances with central banks 19,486 26,788 21,932 (27) (11)
Collateral paid 6,103 4,787 3,835 27 59
Trading securities and financial assets measured
at fair value through income statement (FVIS) 29,307 23,132 21,593 27 36
Derivative financial instruments 21,765 24,101 26,904 (10) (19)
Available-for-sale securities - 61,119 64,857 n/a n/a
Investment securities 68,536 - - n/a n/a
Loans 9 714,297 709,690 701,393 1 2
Other financial assets 6,444 5,517 6,035 17 7
Current tax assets 72 - - - -
Life insurance assets 9,374 9,450 10,481 (1) (11)
Investments in associates 115 115 80 - 44
Property and equipment 1,200 1,329 1,328 (10) (10)
Deferred tax assets 1,723 1,180 1,120 46 54
Intangible assets 11,850 11,763 11,693 1 1
Other assets 790 621 604 27 31
Total assets
891,062 879,592 871,855
1 2
Liabilities
Collateral received 1,889 2,184 3,331 (14) (43)
Deposits and other borrowings 12 555,007 559,285 547,736 (1) 1
Other financial liabilities 29,013 28,105 29,750 3 (2)
Derivative financial instruments 23,384 24,407 24,066 (4) (3)
Debt issues 188,759 172,596 174,138 9 8
Current tax liabilities - 296 299 (100) (100)
Life insurance liabilities 7,503 7,597 8,763 (1) (14)
Provisions 14 2,764 1,928 1,416 43 95
Deferred tax liabilities - 18 17 (100) (100)
Other liabilities 2,072 1,338 1,341 55 55
Total liabilities excluding loan capital
810,391 797,754 790,857
2 2
Loan capital 16,736 17,265 18,333 (3) (9)
Total liabilities
827,127 815,019 809,190
1 2
Net assets
63,935 64,573 62,665
(1) 2
Shareholders’ equity
Share capital:
Ordinary share capital 15 36,351 36,054 35,168 1 3
Treasury shares and RSP treasury shares 15 (557) (493) (565) 13 (1)
Reserves 15 1,141 1,077 890 6 28
Retained profits 26,949 27,883 27,122 (3) (1)
Total equity attributable to owners of
Westpac Banking Corporation 63,884 64,521 62,615
(1) 2
Non-controlling interests 51 52 50 (2) 2
Total shareholders' equity and
non-controlling interests 63,935 64,573 62,665
(1) 2
The above consolidated balance sheet should be read in conjunction with the accompanying notes.
1
The Group has adopted AASB 9 Financial Instruments and AASB 15 Revenue from Contracts with Customers from 1 October 2018.
Statutory comparatives have not been restated. Refer to Note 1 in Section 4 for further detail. However, where applicable, cash
earnings comparatives (excluding expected credit loss provisioning) have been restated to aid comparability. Refer to the cash
earnings policy in Section 1.3.4 for further detail. In addition, during First Half 2019, the Group has made a number of presentational
changes to the Balance Sheet and Income Statement. Both statutory and cash earnings comparatives have been restated. Refer to
Note 1 in Section 4 for further detail.
2019 Interim financial report
Consolidated financial statements
108 | Westpac Group 2019 Interim Financial Results Announcement
4.5 Consolidated statement of changes in equity
1
for the half year ended 31 March 2019
Westpac Banking Corporation and its controlled entities
Total equity Total
attributable shareholders'
to owners equity and
Share of Westpac Non- non-
Capital Retained Banking controlling controlling
$m (Note 15) Reserves profits Corporation Interests interests
Balance at 1 October 2017 34,394 794 26,100 61,288 54 61,342
Net profit for the period - - 4,198 4,198 2 4,200
Net other comprehensive income for the period - 26 11 37 - 37
Total comprehensive income for the period - 26 4,209 4,235 2 4,237
Transactions in capacity as equity holders
Dividends on ordinary shares
2
- - (3,187) (3,187) - (3,187)
Dividend reinvestment plan 310 - - 310 - 310
Other equity movements
Share based payment arrangements - 69 - 69 - 69
Purchase of shares (net of issue costs) (31) - - (31) - (31)
Net (acquisition)/disposal of treasury shares (70) - - (70) - (70)
Other - 1 - 1 (6) (5)
Total contributions and distributions 209 70 (3,187) (2,908) (6) (2,914)
Balance at 31 March 2018 34,603 890 27,122 62,615 50 62,665
Net profit for the period - - 3,897 3,897 2 3,899
Net other comprehensive income for the period - 154 77 231 - 231
Total comprehensive income for the period - 154 3,974 4,128 2 4,130
Transactions in capacity as equity holders
Dividends on ordinary shares
2
- - (3,213) (3,213) - (3,213)
Dividend reinvestment plan 321 - - 321 - 321
Conversion of Convertible Preference Shares 566 - - 566 - 566
Other equity movements
Share based payment arrangements - 34 - 34 - 34
Exercise of employee share options and rights 3 - - 3 - 3
Purchase of shares (net of issue costs) (4) - - (4) - (4)
Net (acquisition)/disposal of treasury shares 72 - - 72 - 72
Other - (1) - (1) - (1)
Total contributions and distributions 958 33 (3,213) (2,222) - (2,222)
Balance at 30 September 2018 35,561 1,077 27,883 64,521 52 64,573
Impact on adoption of new accounting standards
- 2 (727) (725) - (725)
Restated opening balance
35,561 1,079 27,156 63,796 52 63,848
Net profit for the period
- - 3,173 3,173 3 3,176
Net other comprehensive income for the period - (8) (153) (161) 1 (160)
Total comprehensive income for the period - (8) 3,020 3,012 4 3,016
Transactions in capacity as equity holders
Dividends on ordinary shares
2
- - (3,227) (3,227) - (3,227)
Dividend reinvestment plan 330 - - 330 - 330
Other equity movements
Share based payment arrangements - 70 - 70 - 70
Purchase of shares (net of issue costs) (31) - - (31) - (31)
Net (acquisition)/disposal of treasury shares (66) - - (66) - (66)
Other - - - - (5) (5)
Total contributions and distributions 233 70 (3,227) (2,924) (5) (2,929)
Balance at 31 March 2019 35,794 1,141 26,949 63,884 51 63,935
The above consolidated statement of changes in equity should be read in conjunction with the accompanying
notes.
1
The Group has adopted AASB 9 Financial Instruments and AASB 15 Revenue from Contracts with Customers from 1 October 2018.
Statutory comparatives have not been restated. Refer to Note 1 in Section 4 for further detail. However, where applicable, cash
earnings comparatives (excluding expected credit loss provisioning) have been restated to aid comparability. Refer to the cash
earnings policy in Section 1.3.4 for further detail. In addition, during First Half 2019, the Group has made a number of presentational
changes to the Balance Sheet and Income Statement. Both statutory and cash earnings comparatives have been restated. Refer to
Note 1 in Section 4 for further detail.
2
First Half 2019 comprises 2018 final dividend 94 cents (Second Half 2018: 2018 interim dividend 94 cents and First Half 2018: 2017
final dividend 94 cents), all fully franked at 30%.
2019 Interim financial report
Consolidated financial statements
Westpac Group 2019 Interim Financial Results Announcement | 109
4.6 Consolidated cash flow statement
1
for the half year ended 31 March 2019
Westpac Banking Corporation and its controlled entities
% Mov't % Mov't
Half Year Half Year Half Year Mar 19 - Mar 19 -
$m Note March 19 Sept 18 March 18 Sept 18 Mar 18
Cash flows from operating activities
Interest received 16,704 16,641 15,998 - 4
Interest paid (8,777) (7,969) (7,820) 10 12
Dividends received excluding life business 4 8 1 (50) large
Other non-interest income received 2,297 2,155 2,840 7 (19)
Operating expenses paid (4,953) (3,640) (4,249) 36 17
Income tax paid excluding life business (1,877) (1,792) (1,793) 5 5
Life business:
Receipts from policyholders and customers 1,035 1,062 946 (3) 9
Interest and other items of similar nature 4 2 15 100 (73)
Dividends received 51 559 83 (91) (39)
Payments to policyholders and suppliers (843) (1,295) (794) (35) 6
Income tax paid (50) (92) (51) (46) (2)
Cash flows from operating activities before changes in
operating assets and liabilities 3,595 5,639 5,176 (36) (31)
Net (increase)/decrease in:
Collateral paid (1,218) (943) 1,912 29 large
Trading securities and financial assets measured at FVIS (5,426) (1,198) 4,690 large large
Derivative financial instruments 2,668 9,684 (1,100) (72) large
Loans (1,789) (9,976) (14,372) (82) (88)
Other financial assets (234) (340) 807 (31) large
Life insurance assets and liabilities (4) (142) (88) (97) (95)
Other assets 2 2 8 - (75)
Net increase/(decrease) in:
Collateral received (317) (1,147) 852 (72) large
Deposits and other borrowings (7,572) 11,920 12,008 large large
Other financial liabilities 1,009 (1,393) (2,239) large large
Other liabilities (8) 14 (4) large 100
Net cash provided by/(used in) operating activities
(9,294) 12,120 7,650
large large
Cash flows from investing activities
Proceeds from available-for-sale securities - 12,383 11,495 n/a n/a
Purchase of available-for-sale securities - (8,801) (15,575) n/a n/a
Proceeds from investment securities 12,972 - - n/a n/a
Purchase of investment securities (19,384) - - n/a n/a
Proceeds/(payments) from disposal of controlled entities, net of cash disposed 16 (1) - 9 - large
Proceeds from disposal of associates 44 - - - -
Purchase of associates (16) (17) (13) (6) 23
Proceeds from disposal of property and equipment 51 28 63 82 (19)
Purchase of property and equipment (92) (215) (95) (57) (3)
Purchase of intangible assets (395) (493) (389) (20) 2
Net cash provided by/(used in) investing activities
(6,821) 2,885 (4,505)
large 51
Cash flows from financing activities
Proceeds from debt issues (net of issue costs) 39,293 24,986 34,470 57 14
Redemption of debt issues (26,728) (32,352) (32,346) (17) (17)
Issue of loan capital (net of issue costs) 690 724 1,618 (5) (57)
Redemption of loan capital (1,651) (1,362) (1,025) 21 61
Proceeds from exercise of employee options - 3 - (100) -
Purchase of shares on exercise of employee options and rights (4) (4) (4) - -
Shares purchased for delivery of employee share plan (27) - (27) - -
Purchase of RSP treasury shares (66) (1) (70) large (6)
Net sale/(purchase) of other treasury shares - 73 - (100) -
Payment of dividends (2,897) (2,892) (2,877) - 1
Payment of distributions to non-controlling interests (5) - (6) - (17)
Net cash provided by/(used in) financing activities
8,605 (10,825) (267)
large large
Net increase/(decrease) in cash and balances with central banks (7,510) 4,180 2,878 large large
Effect of exchange rate changes on cash and balances with central banks
208 676 268 (69) (22)
Cash and balances with central banks as at the beginning of the period 26,788 21,932 18,786 22 43
Cash and balances with central banks as at the end of the period
19,486 26,788 21,932
(27) (11)
The above consolidated cash flow statement should be read in conjunction with the accompanying notes. Details
of the reconciliation of net cash provided by/(used in) operating activities to net profit are provided in Note 16.
1
The Group has adopted AASB 9 Financial Instruments and AASB 15 Revenue from Contracts with Customers from 1 October 2018.
Statutory comparatives have not been restated. Refer to Note 1 in Section 4 for further detail. However, where applicable, cash
earnings comparatives (excluding expected credit loss provisioning) have been restated to aid comparability. Refer to the cash
earnings policy in Section 1.3.4 for further detail. In addition, during First Half 2019, the Group has made a number of presentational
changes to the Balance Sheet and Income Statement. Both statutory and cash earnings comparatives have been restated. Refer to
Note 1 in Section 4 for further detail.
2019 Interim financial report
Notes to the consolidated financial statements
110 | Westpac Group 2019 Interim Financial Results Announcement
4.7 Notes to the consolidated financial statements
Note 1. Financial statements preparation
This general purpose Interim Financial Report for the half year ended 31 March 2019 has been prepared in
accordance with Australian Accounting Standard AASB 134 Interim Financial Reporting and the Corporations Act
2001 and is also compliant with International Accounting Standard IAS 34 Interim Financial Reporting.
The Interim Financial Report does not include all the notes of the type normally included in an annual financial
report. Accordingly, this Interim Financial Report is to be read in conjunction with the annual financial report for the
year ended 30 September 2018 and any relevant public announcements made by Westpac during the interim
reporting period in accordance with the continuous disclosure requirements of the Corporations Act 2001 and the
ASX Listing Rules.
The Interim Financial Report complies with current Australian Accounting Standards (AAS) as they relate to interim
financial reports.
The Interim Financial Report was authorised for issue by the Board of Directors on 6 May 2019.
All amounts have been rounded in accordance with ASIC Corporations (Rounding in Financial/Directors’ Reports)
Instrument 2016/191, to the nearest million dollars, unless otherwise stated.
Comparative revisions
Comparative information has been revised where appropriate to conform with changes in presentation in the
current half and to enhance comparability.
Critical accounting assumptions and estimates
In preparing the Interim Financial Report, the application of the Group’s accounting policies requires the use of
judgement, assumptions and estimates.
The areas of judgement, assumptions and estimates in the Interim Financial Report, including the key sources of
estimation uncertainty, are consistent with those in the annual financial report for the year ended 30 September
2018 with the exception of those relevant to the Group due to the adoption of AASB 9 Financial instruments
(December 2014) (AASB 9). These include the concept of a significant increase in credit risk and the use of
forward looking information as described in the “Amendments to Accounting Standards effective this period -
AASB 9 Financial Instruments (December 2014) (AASB 9)” section.
Details on specific judgements in relation to material Compliance, regulation and remediation provisions are
included in Note 14.
Future developments in accounting standards
The following new standards and interpretations which may have a material impact on the Group have been
issued but are not yet effective, and unless otherwise stated, have not been early adopted by the Group:
AASB 16 Leases (AASB 16) was issued on 23 February 2016 and will be effective for the 30 September 2020
financial year. The standard will not result in significant changes for lessor accounting. The main changes under
the standard are:
• all operating leases of greater than 12 months duration will be required to be presented on balance sheet by
the lessee as a right-of-use asset and lease liability. The asset and liability will initially be measured at the
present value of non-cancellable lease payments and payments to be made in optional periods where it is
reasonably certain that the option will be exercised; and
• all leases on balance sheet will give rise to a combination of interest expense on the lease liability and
depreciation of the right-of-use asset.
Alternative methods of calculating the right-of-use asset are allowed under AASB 16 which impact the size of the
transition adjustment. The Group expects to apply a simplified approach under which the right-of-use asset and
the lease liability will be measured at the same amount on the transition date with no restatement of comparatives.
This approach will result in assets and liabilities increasing by the same amount on the transition date with no
effect on net assets or retained earnings.
AASB 17 Insurance Contracts was issued on 19 July 2017 and will be effective for the 30 September 2022 year
end unless early adopted. This will replace AASB 4 Insurance Contracts, AASB 1023 General Insurance Contracts
and AASB 1038 Life Insurance Contracts. The main changes under the standard are:
• the scope of the standard may result in some contracts that are currently “unbundled”, i.e. accounted for
separately as insurance and investment contracts being required to be “bundled” and accounted for as an
insurance contract;
2019 Interim financial report
Notes to the consolidated financial statements
Westpac Group 2019 Interim Financial Results Announcement | 111
Note 1. Financial statements preparation (continued)
• portfolios of contracts (with similar risks which are managed together) will be required to be disaggregated to a
more granular level by both the age of a contract and the likelihood of the contract being onerous in order to
determine the recognition of profit over the contract period (i.e. the contractual service margin). The contractual
service margin uses a different basis to recognise profit to the current Margin on Services approach for life
insurance and therefore the pattern of profit recognition is likely to differ;
• risk adjustments, which reflect uncertainties in the amount and timing of future cash flows, are required for both
general and life insurance contracts rather than just general insurance contracts under the current accounting
standards;
• the contract boundary, which is the period over which profit is recognised, differs and is determined based on
the ability to compel the policyholder to pay premiums or the substantive obligation to provide
coverage/services. For some general insurance contracts (e.g. some lender mortgage insurance and
reinsurance contracts) this may result in the contract boundary being longer. For life insurance, in particular
term renewable contracts, the contract boundary is expected to be shorter. Both will be impacted by different
patterns of profit recognition compared to the current standards;
• a narrower definition of what acquisition costs may be deferred;
• an election to recognise changes in assumptions regarding discount rate in other comprehensive income rather
than in profit and loss;
• an election to recognise changes in the fair value of assets supporting policy liabilities in other comprehensive
income rather than through profit and loss;
• reinsurance contracts and the associated liability are to be determined separately to the gross contract liability
and may have different contract boundaries; and
• additional disclosure requirements.
The standard is expected to result in a reduction in the level of deferred acquisition costs, however the quantum of
this and the profit and loss impacts to the Group are not yet practicable to determine.
On 23 January 2019, the IASB Board agreed to a number of proposed amendments to the insurance contracts
standard. These proposed amendments will be included in an exposure draft expected to be released around the
end of the first half of 2019 for public consultation. If approved, these amendments include allowing entities to:
• defer acquisition costs for anticipated renewals outside of the initial contract boundary; and
• recognise a gain in the P&L for reinsurance contracts, to offset losses from onerous contracts on initial
recognition (to the extent the reinsurance contracts held covers the losses of each contract on a proportionate
basis)
In addition, the effective date of the standard would be deferred by one year to be applicable to the Group for the
30 September 2023 financial year.
2019 Interim financial report
Notes to the consolidated financial statements
112 | Westpac Group 2019 Interim Financial Results Announcement
Note 1. Financial statements preparation (continued)
Changes in accounting policies
Balance sheet
The following voluntary presentation changes to the balance sheet (and related notes) have been made to improve
consistency and provide more relevant information to the users of the financial statements by reporting balances of
a similar nature together in the same place in the balance sheet. These changes have no effect on the
measurement of these items and therefore had no impact on retained earnings or net profit. These changes are:
• the addition of new balance sheet lines for ‘collateral paid’, ‘other financial assets’, ‘collateral received’ and
‘other financial liabilities’;
• removal of the balance sheet line ‘receivables due from other financial institutions’ and reclassification to
‘collateral paid’ and ‘other financial assets’;
• removal of the balance sheet line ‘regulatory deposits with central banks overseas’ and reclassification to ‘cash
and balances with central banks’ and ‘trading securities and financial assets measured at fair value through
Income Statement (FVIS);
• removal of the balance sheet line ‘payables due to other financial institutions’ and reclassification to ‘collateral
received’ and ‘other financial liabilities’;
• reclassification of collateral balances with non-financial institutions from ‘other assets’ and ‘other liabilities’ to
‘collateral paid’ and ‘collateral received’ respectively;
• reclassification of financial assets or financial liabilities included in other assets or other liabilities respectively to
other financial assets and other financial liabilities respectively; and
• reclassification of other financial liabilities at FVIS to other financial liabilities.
Collateral paid/collateral received includes cash provided to/received from counterparties as collateral over
financial liabilities/assets arising from derivative contracts, stock borrowing arrangements and funding
transactions. It includes initial and variation margin placed as security for derivative transactions.
Comparatives have been restated for these voluntary presentation changes and are detailed as follows.
30 Sept 2018 31 March 2018
Presentation Presentation
$m Reported changes Restated Reported changes Restated
Assets
Cash and balances with central banks 26,431 357 26,788 21,580 352 21,932
Receivables due from other financial institutions 5,790 (5,790) - 3,977 (3,977) -
Collateral paid - 4,787 4,787 - 3,835 3,835
Trading securities and financial assets measured at FVIS 22,134 998 23,132 20,627 966 21,593
Regulatory deposits with central banks overseas 1,355 (1,355) - 1,318 (1,318) -
Other financial assets - 5,517 5,517 - 6,035 6,035
Other assets 5,135 (4,514) 621 6,497 (5,893) 604
All other assets 818,747 - 818,747 817,856 - 817,856
Total assets 879,592 - 879,592 871,855 - 871,855
Liabilities
Payables due to other financial institutions 18,137 (18,137) - 19,073 (19,073) -
Collateral received - 2,184 2,184 - 3,331 3,331
Other financial liabilities at FVIS 4,297 (4,297) - 5,590 (5,590) -
Other financial liabilities - 28,105 28,105 - 29,750 29,750
Other liabilities 9,193 (7,855) 1,338 9,759 (8,418) 1,341
All other liabilities 783,392
-
783,392 774,768 - 774,768
Total liabilities 815,019 - 815,019 809,190 - 809,190
2019 Interim financial report
Notes to the consolidated financial statements
Westpac Group 2019 Interim Financial Results Announcement | 113
Note 1. Financial statements preparation (continued)
Income statement
The following voluntary presentation changes to the income statement (and related notes) have been made to
provide more relevant information to the users of the financial statements. These changes have no effect on the
measurement of these items and therefore had no impact on retained earnings or net profit.
Net interest income
• the components of interest income and interest expense relating to the balance sheet reclassifications have
been restated accordingly. Note that there was no net impact to total interest income, total interest expense or
to total net interest income. Comparatives have been restated for these voluntary presentation changes and
are detailed in the following table.
• in addition, to comply with disclosure requirements, interest income derived from financial assets measured at
amortised cost and at fair value through other comprehensive income (FVOCI) has been presented separately
from other interest income. For consistency, interest expense is presented in the same way. The details are
provided in Note 3.
Half Year 30 Sept 2018 Half Year 31 March 2018
Presentation
Presentation
$m Reported changes Restated Reported changes Restated
Note 3: Net interest income
Interest Income
Cash and balances with central banks
185 - 185 140 1 141
Receivables due from other financial institutions
59 (59) - 49 (49) -
Collateral paid
- 74 74 - 55 55
Net ineffectiveness on qualifying hedges
(5) - (5) (13) - (13)
Trading securities and financial assets measured at FVIS
267 14 281 275 8 283
Available-for-sale securities
984 - 984 930 - 930
Investment securities
- - - - - -
Loans
14,943 - 14,943 14,678 - 14,678
Regulatory deposits with central banks overseas
14 (14) - 9 (9) -
Other interest income
34 (15) 19 22 (6) 16
Total interest income
16,481 - 16,481
16,090 - 16,090
Interest Expense
Payables due to other financial institutions
(166) 166 - (153) 153 -
Collateral received
- (27) (27) - (18) (18)
Deposits and other borrowings
(4,653) - (4,653) (4,368) - (4,368)
Trading liabilities
(385) - (385) (574) - (574)
Debt issues
(2,392) - (2,392) (2,088) - (2,088)
Loan capital
(398) - (398) (376) - (376)
Bank levy
(192) - (192)
(186) - (186)
Other interest expense
(68) (139) (207) (67) (135) (202)
Total interest expense
(8,254) - (8,254)
(7,812)
-
(7,812)
Total net interest income
8,227 - 8,227
8,278
-
8,278
2019 Interim financial report
Notes to the consolidated financial statements
114 | Westpac Group 2019 Interim Financial Results Announcement
Note 1. Financial statements preparation (continued)
Non-interest income and operating expenses
• disaggregating the non-interest income line on the income statement into four separate lines for net fee
income, net wealth management and insurance income, trading income and other income.
• separating net fee income in the non-interest income note into fee income and fee expenses.
• reclassifying credit card loyalty program expense from operating expenses to the new fee expenses category in
the non-interest income note.
Fee expenses include those expenses that are incremental external costs that vary directly with the provision of
goods or services to customers (excluding expenses which would qualify as transaction costs relating to the issue,
acquisition or disposal of a financial asset or a financial liability which are deferred and included in the effective
interest rate and recognised in net interest income).
An incremental cost is one that would not have been incurred if a specific good or service had not been provided
to a specific customer.
Comparatives have been restated for these voluntary presentation changes and are detailed in the following table.
Half Year 30 Sept 2018 Half Year 31 March 2018
Presentation
Presentation
$m Reported changes Restated Reported changes Restated
Income statement
Net interest income
8,227 - 8,227 8,278 - 8,278
Non-interest income
2,753 (2,753) - 2,875 (2,875) -
Net fee income
- 1,146 1,146 - 1,278 1,278
Net wealth management and insurance income
- 1,110 1,110 - 951 951
Trading income
- 458 458 - 487 487
Other income
- (17) (17) - 89 89
Net operating income before operating expenses and impairment charges
10,980 (56) 10,924 11,153 (70) 11,083
Operating expenses
(4,967) 56 (4,911) (4,725) 70 (4,655)
Impairment charges
(317) - (317) (393) - (393)
Profit before income tax
5,696 - 5,696
6,035 - 6,035
Income tax expense
(1,797) - (1,797) (1,835) - (1,835)
Net profit for the period
3,899 - 3,899
4,200 - 4,200
Half Year 30 Sept 2018 Half Year 31 March 2018
Presentation Presentation
Note 4: Non-interest income (extract) Reported changes Restated Reported changes Restated
Net fee income
Facility fees
668 9 677
679 9 688
Transaction fees
552 41 593
553 36 589
Other non-risk fee income
(18) - (18)
116 - 116
Fee income
1,202 50 1,252
1,348 45 1,393
Credit card loyalty programs
- (56) (56)
- (70) (70)
Transaction fee related expenses
- (50) (50)
- (45) (45)
Fee expenses
- (106) (106)
- (115) (115)
Net fee income
1,202 (56) 1,146
1,348 (70) 1,278
Half Year 30 Sept 2018 Half Year 31 March 2018
Presentation Presentation
Note 5: Operating expenses (extract) Reported changes Restated Reported changes Restated
Credit card loyalty programs
56 (56) -
70 (70) -
Total other expenses
898 (56) 842
764 (70) 694
Total operating expenses
4,967 (56) 4,911
4,725 (70) 4,655
2019 Interim financial report
Notes to the consolidated financial statements
Westpac Group 2019 Interim Financial Results Announcement | 115
Note 1. Financial statements preparation (continued)
Amendments to Accounting Standards effective this period
AASB 9 Financial Instruments (December 2014) (AASB 9)
The Group adopted AASB 9 on 1 October 2018. The adoption of AASB 9 has been applied by adjusting the
opening balance sheet at 1 October 2018, with no restatement of comparatives as permitted by the standard. The
adoption of AASB 9 reduced retained earnings at 1 October 2018 by $722 million (net of tax), primarily due to the
increase in impairment provisions under the new standard.
The key changes in accounting policies and the impact of transition are outlined as follows.
Impairment
AASB 9 introduces a revised impairment model which requires entities to recognise expected credit losses (ECL)
based on unbiased forward looking information, replacing the incurred loss model under AASB 139 which only
recognised impairment if there was objective evidence that a loss had been incurred. The revised impairment
model applies to all financial assets at amortised cost, lease receivables, debt securities measured at FVOCI, and
credit commitments.
Measurement
The Group calculates the provisions for ECL based on a three stage approach. ECL are a probability-weighted
estimate of the cash shortfalls expected to result from defaults over the relevant timeframe. They are determined
by evaluating a range of possible outcomes and taking into account the time value of money, past events, current
conditions and forecasts of future economic conditions.
The models use three main components to determine the ECL (as well as the time value of money) including:
• Probability of default (PD): the probability that a counterparty will default;
• Loss given default (LGD): the loss that is expected to arise in the event of a default; and
• Exposure at default (EAD): the estimated outstanding amount of credit exposure at the time of the default.
Model stages
The three stages are as follows:
Stage 1: 12 months ECL - performing
For financial assets where there has been no significant increase in credit risk since origination a provision for
12 months ECL is recognised. Interest revenue is calculated based on gross carrying amount of the financial
asset.
Stage 2: Lifetime ECL – performing
For financial assets where there has been a significant increase in credit risk since origination but where the asset
is still performing a provision for lifetime ECL is recognised.
Determining when a financial asset has experienced a significant increase in credit risk since origination is a
critical accounting judgement which is primarily based on changes in internal customer risk grades since
origination of the facility. A change in an internal customer risk grade is based on both quantitative and qualitative
factors. The number of changes in the internal customer risk grade that the Group uses to represent a significant
increase in credit risk is determined on a sliding scale where the number of changes will typically be higher for an
exposure with a lower credit risk grade compared to an exposure with a higher credit risk grade.
The Group does not rebut the presumption that instruments that are 30 days past due have experienced a
significant increase in risk but this is used as a backstop rather than the primary indicator.
The Group does not apply the low credit risk exemption which assumes investment grade facilities do not have a
significant increase in credit risk.
Interest revenue is calculated based on gross carrying amount of the financial asset.
Stage 3: Lifetime ECL – non-performing
1
For financial assets that are non-performing a provision for lifetime ECL is recognised. Indicators include a breach
of contract with the Group such as a default on interest or principal payments, a borrower experiencing significant
financial difficulties or observable economic conditions that correlate to defaults on a group of loans.
Interest revenue is calculated based on the carrying amount net of the provision for ECL rather than the gross
carrying amount.
1
Refer to Note 11 and Glossary for definition of non-performing loans.
2019 Interim financial report
Notes to the consolidated financial statements
116 | Westpac Group 2019 Interim Financial Results Announcement
Note 1. Financial statements preparation (continued)
Collective and individual assessment
Financial assets that are in stages 1 and 2 are assessed on a collective basis as are financial assets in stage 3
below specified thresholds. Those financial assets in stage 3 above the specified thresholds are assessed on an
individual basis.
Expected life
Expected credit losses are determined as a lifetime expected credit loss in stages 2 and 3.
In considering the lifetime timeframe the standard generally requires use of the remaining contractual life adjusted
where appropriate for prepayments, extension and other options. For certain revolving credit facilities which
include both a drawn and undrawn component (e.g. credit cards and revolving lines of credit), the Group’s
contractual ability to demand repayment and cancel the undrawn commitment does not limit our exposure to credit
losses to the contractual notice period. For these facilities, lifetime is based on historical behaviour.
Movement between stages
Assets may move in both directions through the stages of the impairment model. Assets previously in stage 2 may
move back to stage 1 if it is no longer considered that there has been a significant increase in credit risk. Similarly,
assets in stage 3 may move back to stage 2 if they are no longer assessed to be non-performing.
Forward looking information
The measurement of ECL for each stage and the assessment of significant increase in credit risk consider
information about past events and current conditions as well as reasonable and supportable projections of future
events and economic conditions. The estimation of forward looking information is a critical accounting judgement.
The Group considers three future macroeconomic scenarios including a base case scenario along with upside and
downside scenarios.
The macroeconomic variables used in these scenarios, based on current economic forecasts, include (but are not
limited to) unemployment rates, real gross domestic product growth rates and residential and commercial property
price indices.
Base case scenario
This scenario utilises the internal Westpac economics forecast used for strategic decision making and forecasting.
This assumes low GDP growth, declines in residential property price indices and the cash rate.
Upside scenario
This scenario represents a modest improvement on the base case scenario.
Downside scenario
This scenario is used in the Group’s stress testing and represents a moderate recession. In this scenario the
economy weakens with declines in GDP growth, commercial property prices and more significant declines in
residential property prices. It also assumes an increase in the unemployment rate. In a deteriorating economy
there may be times when a more severe downside scenario is required which will be monitored as part of the
governance framework.
The macroeconomic scenarios are weighted based on the Group’s best estimate of the relative likelihood of each
scenario. The weighting applied to each of the three forward looking macroeconomic scenario takes into account
historical frequency, current trends, and forward looking conditions.
The macroeconomic variables and probability weightings of the three scenarios are subject to the approval of the
Group Chief Financial Officer and Chief Risk Officer with oversight from the Board of Directors (and its
Committees).
Where appropriate, adjustments are made to modelled outcomes to reflect reasonable and supportable
information not already incorporated in the models.
Recognition
The ECL determined under AASB 9 are recognised as follows:
• Loans (including lease receivables) and debt securities at amortised cost: as a reduction of the carrying value
of the financial asset through an offsetting provision account (refer to Notes 9 and 10);
• Debt securities at FVOCI: in reserves in other comprehensive income with no reduction of the carrying value of
the debt security itself (refer to Note 15); and
• Credit commitments: as a provision (refer to Note 14).
2019 Interim financial report
Notes to the consolidated financial statements
Westpac Group 2019 Interim Financial Results Announcement | 117
Note 1. Financial statements preparation (continued)
Classification and measurement
AASB 9 replaced the classification and measurement model in AASB 139 with a new model that categorises
financial assets based on a) the business model within which the assets are managed, and b) whether the
contractual cash flows under the instrument represent solely payment of principal and interest (SPPI).
The Group determines the business model at the level that reflects how groups of financial assets are managed.
When assessing the business model the Group considers factors including how performance and risks are
managed, evaluated and reported and the frequency and volume of, and reason for, sales in previous periods, and
expectations of sales in future periods.
When assessing whether contractual cash flows are SPPI, interest is defined as consideration primarily for the
time value of money and the credit risk of the principal outstanding. The time value of money is defined as the
element of interest that provides consideration only for the passage of time and not consideration for other risks or
costs associated with holding the financial asset. Terms that could change the contractual cash flows so that they
may not meet the SPPI criteria include contingent and leverage features, non-recourse arrangements, and
features that could modify the time value of money.
Financial assets
Debt instruments
If the debt instruments have contractual cash flows that represent SPPI on the principal balance outstanding they
are classified at:
• amortised cost if they are held with a business model which is achieved through holding the financial asset to
collect these cash flows; or
• FVOCI if they are held with a business model which is achieved both through collecting these cash flows or
selling the financial asset; or
• FVIS if they are held with a business model which is achieved through selling the financial asset.
Debt instruments are also measured at FVIS where the contractual cash flows do not represent SPPI on the
principal balance outstanding or where it is designated at FVIS to eliminate or reduce and accounting mismatch.
Debt instruments at amortised cost are initially recognised at fair value and subsequently measured at amortised
cost using the effective interest rate method. They are presented net of provisions for ECL determined using the
ECL model described above.
Debt instruments at FVOCI are measured at fair value with unrealised gains and losses recognised in other
comprehensive income except for interest income, impairment charges and foreign exchange gains and losses
which are recognised in the income statement.
Impairment on debt instruments at FVOCI is determined using the ECL model described above and is recognised
in the income statement with a corresponding amount in other comprehensive income. There is no reduction of the
carrying value of the debt security which remains at fair value.
The cumulative gain or loss recognised in other comprehensive income is subsequently recognised in the income
statement when the instrument is disposed.
Debt instruments at FVIS are measured at fair value with subsequent changes in fair value recognised in the
income statement.
Equity securities
Equity securities are measured at FVOCI where they:
• are not held for trading; and
• an irrevocable election is made by the Group.
Otherwise, they are measured at FVIS.
Equity securities at FVOCI are measured at fair value with unrealised gains and losses recognised in other
comprehensive income except for dividend income which is recognised in the income statement. The cumulative
gain or loss recognised in other comprehensive income is not subsequently recognised in the income statement
when the instrument is disposed.
Equity securities at FVIS are measured at fair value with subsequent changes in fair value recognised in the
income statement.
2019 Interim financial report
Notes to the consolidated financial statements
118 | Westpac Group 2019 Interim Financial Results Announcement
Note 1. Financial statements preparation (continued)
Financial liabilities
Financial liabilities are measured at amortised cost if they are not held for trading or designated at FVIS otherwise
they are measured at FVIS. This remains unchanged from the AASB 139.
In the 2014 financial year, the Group early adopted part of AASB 9 which relates to the recognition of the changes
in fair value of financial liabilities designated at fair value attributable to Westpac’s own credit risk in other
comprehensive income (except where it would create an accounting mismatch, in which case all changes in fair
value are recognised in the income statement). As a result, the accounting for this remains unchanged for the
Group.
Hedging
AASB 9 changes hedge accounting by increasing the eligibility of both hedged items and hedging instruments and
introducing a more principles-based approach to assessing hedge effectiveness. Adoption of the new hedge
accounting model is optional until the IASB completes its accounting for dynamic risk management project. Until
this time, current hedge accounting under AASB 139 can continue to be applied. The Group has applied the option
to continue hedge accounting under AASB 139, however the Group has adopted the amended AASB 7 hedge
accounting disclosures as required.
AASB 15 Revenue from Contracts with Customers (AASB 15)
The Group adopted AASB 15 on 1 October 2018. It replaced AASB 118 Revenue and related interpretations and
applies to all contracts with customers, except leases, financial instruments and insurance contracts. The standard
provides a systematic approach to revenue recognition by introducing a five-step model governing revenue
measurement and recognition. This includes:
• identifying the contract with customer;
• identifying each of the performance obligations included in the contract;
• determining the amount of consideration in the contract;
• allocating the consideration to each of the identified performance obligations; and
• recognising revenue as each performance obligation is satisfied.
The Group has applied AASB 15 by reducing the opening balance of retained earnings at the date of initial
application, 1 October 2018, by $5 million (net of tax) with no comparatives restatement.
In addition, the Group identified certain income and expenses which were previously reported on a net basis
primarily within fee income which are now being presented on a gross basis.
Finally, certain facility fees have been reclassified from non-interest income to interest income.
Transition (AASB 9 and AASB 15)
Impact of the adoption of AASB 9 – impairment
The following table shows the impact of the adoption of AASB 9 on impairment balances.
Consolidated
$m
Provisions on
loans
Provisions for
credit
commitments
Loss allowance
on debt
securities at
FVOCI
1
Provisions on debt
securities and
other financial
assets at
amortised cost Total
30 September 2018 - carrying amount 2,814 239
-
- 3,053
ECL on amortised cost financial instruments 882 98
-
9 989
ECL on debt securities measured at FVOCI - -
2
- 2
1 October 2018 - AASB 9 carrying amount 3,696 337
2
9 4,044
Impact of the adoption of AASB 9 – classification and measurement
Investment securities
Investment securities represent all debt and equity securities not measured at FVIS. Investment securities include
debt securities at amortised cost and both debt and equity securities at FVOCI.
1
Impairment on debt securities at FVOCI is recognised in the income statement with a corresponding amount in other comprehensive
income (Refer to Note 15). There is no reduction of the carrying value of the debt security which remains at fair value.
2019 Interim financial report
Notes to the consolidated financial statements
Westpac Group 2019 Interim Financial Results Announcement | 119
Note 1. Financial statements preparation (continued)
As a result of the adoption of AASB 9, available-for-sale debt securities of $811 million have been reclassified to
investment securities - debt securities at amortised cost as the business model for these instruments is achieved
by collecting the contractual cash flows and these cash flows represent SPPI. The remaining available for sale
debt securities have been reclassified to investment securities measured at FVOCI
In addition, available-for-sale equity securities have been assessed on an instrument by instrument basis.
$275 million of available-for-sale equity securities have been reclassified to trading securities and financial assets
measured at FVIS. The Group has elected to irrevocably designate the remaining $109 million of available-for-sale
equity securities to continue to be measured at FVOCI.
Loans
As a result of the adoption of AASB 9, $56 million of loans previously measured at amortised cost will be
measured at FVIS as the cash flows of the loan do not represent SPPI.
Basis of measurement
The basis of measurement of financial assets and financial liabilities under AASB 139 and AASB 9 are presented
in the following table.
30 September 2018 1 October 2018
Change in
AASB 139 measurement basis
Measurement
AASB 9 measurement basis
Amortised Basis under Amortised
$m cost FVIS FVOCI Total AASB 9 cost FVIS FVOCI Total
Financial assets
Cash and balances with central banks
26,788 - - 26,788 No 26,788 - - 26,788
Collateral paid
4,787 - - 4,787 No 4,787 - - 4,787
Trading securities and financial assets
measured at FVIS
- 23,132 - 23,132 No - 23,132 - 23,132
Derivative financial instruments
- 24,101 - 24,101 No - 24,101 - 24,101
Available for sale securities
- - 61,119 61,119 Yes 811 275 60,033 61,119
Loans
709,144 546 - 709,690 Yes 709,088 602 - 709,690
Life insurance assets
- 9,450 - 9,450 No - 9,450 - 9,450
Other financial assets
5,517 - - 5,517 No 5,517 - - 5,517
Total financial assets
746,236 57,229 61,119 864,584
746,991 57,560 60,033 864,584
Financial liabilities
Collateral received 2,184 - - 2,184 No 2,184 - - 2,184
Deposits and other borrowings 518,107 41,178 - 559,285 No 518,107 41,178 - 559,285
Other financial liabilities 23,808 4,297 - 28,105 No 23,808 4,297 - 28,105
Derivative financial instruments - 24,407 - 24,407 No - 24,407 - 24,407
Debt issues 169,241 3,355 - 172,596 No 169,241 3,355 - 172,596
Life insurance liabilities
- 7,597 - 7,597 No - 7,597 - 7,597
Loan capital 17,265 - - 17,265 No 17,265 - - 17,265
Total financial liabilities 730,605 80,834 - 811,439 730,605 80,834 - 811,439
2019 Interim financial report
Notes to the consolidated financial statements
120 | Westpac Group 2019 Interim Financial Results Announcement
Note 1. Financial statements preparation (continued)
Reconciliation of the opening balance sheet
The table below reconciles the reported 30 September 2018 balance sheet to the 1 October 2018 opening balance
sheet on adoption of AASB 9 and AASB 15 showing separately the impact of adjustments relating to
reclassification and remeasurement including the related tax impacts.
30 September 2018 1 October 2018
Restated Opening
Consolidated carrying AASB 9 changes AASB 15 carrying
$m amount Reclassification
Remeasurement
1
changes amount
Assets
Cash and balances with
central banks 26,788 - - - 26,788
Collateral paid 4,787 - - - 4,787
Trading securities and financial assets
measured at FVIS 23,132 275 - - 23,407
Derivative financial instruments 24,101 - - - 24,101
Available-for-sale securities 61,119 (61,119) - - -
Investment securities - 60,844 (9) - 60,835
Loans (at amortised cost) 709,144 (56) (925) - 708,163
Loans (at fair value) 546 56 - - 602
Other financial assets 5,517 - - - 5,517
Deferred tax assets 1,180 - 300 - 1,480
All other assets 23,278 - - - 23,278
Total assets 879,592 -
(634)
- 878,958
Liabilities
Collateral received 2,184 - - - 2,184
Deposits and other borrowings 559,285 - - - 559,285
Other financial liabilities 28,105 - - (12) 28,093
Derivative financial instruments 24,407 - - - 24,407
Debt issues 172,596 - - - 172,596
Provisions 1,928 - 98 - 2,026
Loan capital 17,265 - - - 17,265
All other liabilities 9,249 - (12) 17 9,254
Total liabilities 815,019 - 86 5 815,110
Net assets 64,573 - (720) (5) 63,848
Shareholders’ equity
Share capital:
Ordinary shares 36,054 - - - 36,054
Treasury shares and RSP treasury shares (493) - - - (493)
Reserves 1,077 - 2 - 1,079
Retained profits 27,883 - (722) (5) 27,156
Total equity attributable to owners
of Westpac Banking Corporation 64,521 - (720) (5) 63,796
Non-controlling interests 52 - - - 52
Total shareholders’ equity and
non-controlling interests 64,573 - (720) (5) 63,848
As permitted by AASB 9 and AASB 15, comparatives have not been restated. Comparatives have been restated
for voluntary presentation changes as detailed in the section “changes in accounting policies” above.
1
The impact on adoption of expected credit loss provisioning resulted in increases in provisions on loans by $882 million, provisions on
debt securities at amortised cost by $9 million, provisions for credit commitments by $98 million and loss allowance on debt securities
measured at FVOCI by $2 million.
2019 Interim financial report
Notes to the consolidated financial statements
Westpac Group 2019 Interim Financial Results Announcement | 121
Note 2. Segment reporting
Operating segments are presented on a basis consistent with information provided internally to Westpac’s key
decision makers and reflects the management of the business, rather than the legal structure of the Group.
Internally, Westpac uses ‘cash earnings’ in assessing the financial performance of its divisions. Management
believes this allows the Group to:
• more effectively assess current year performance against prior years;
• compare performance across business divisions; and
• compare performance across peer companies.
Cash earnings is viewed as a measure of the level of profit that is generated by ongoing operations and is
therefore considered in assessing distributions, including dividends. Cash earnings is neither a measure of cash
flow nor net profit determined on a cash accounting basis, as it includes both cash and non-cash adjustments to
statutory net profit.
To determine cash earnings, three categories of adjustments are made to statutory results:
• material items that key decision makers at Westpac believe do not reflect the Group’s operating performance;
• items that are not considered when dividends are recommended, such as the amortisation of intangibles,
impact of Treasury shares and economic hedging impacts; and
• accounting reclassifications between individual line items that do not impact statutory results.
Reportable operating segments
On 19 March 2019, the Group announced changes to the way it supports customer’s wealth and insurance needs,
realigning its major BTFG businesses into expanded Consumer and Business divisions and exiting the provision of
personal financial advice. Changes to the Group’s organisation structure were effective from 1 April 2019.
However, up to 31 March 2019, the accounting and financial performance continued to be reported (both internally
and externally) on the basis of the existing structure.
The operating segments are defined by the customers they service and the services they provide:
• Consumer Bank (CB):
- responsible for sales and service of banking and financial products and services;
- customer base is consumer in Australia; and
- operates under the Westpac, St.George, BankSA, Bank of Melbourne and RAMS brands.
• Business Bank (BB):
- responsible for sales and service of banking and financial products and services;
- customer base is SME and commercial business customers in Australia for facilities up to approximately
$150 million; and
- operates under the Westpac, St.George, BankSA and Bank of Melbourne brands.
• BT Financial Group (Australia) (BTFG):
- Westpac’s Australian wealth management and insurance division;
- services include the manufacturing and distribution of investment, superannuation and retirement products,
wealth administration platforms, private wealth, margin lending and equities broking;
- BTFG’s insurance business covers the manufacturing and distribution of life, general and lenders mortgage
insurance;
- in addition to the BT brand, BTFG operates a range of financial services brands along with the banking
brands of Westpac, St.George, Bank of Melbourne and BankSA for Private Wealth and Insurance.
• Westpac Institutional Bank (WIB):
- Westpac’s institutional financial services division delivering a broad range of financial products and services;
- services include transactional banking, financing and debt capital markets, specialised capital, and alternative
investment solutions;
- customer base includes commercial, corporate, institutional and government customers;
- customers are supported throughout Australia, as well as via branches and subsidiaries located in New
Zealand, US, UK and Asia; and
- also responsible for Westpac Pacific, providing a range of banking services in Fiji and Papua New Guinea.
2019 Interim financial report
Notes to the consolidated financial statements
122 | Westpac Group 2019 Interim Financial Results Announcement
Note 2. Segment reporting (continued)
• Westpac New Zealand:
- responsible for sales and service of banking, wealth and insurance products to customers in New Zealand;
- customer base includes consumers, business and institutional customers; and
- operates under the Westpac brand for banking products, the Westpac Life brand for life insurance products
and the BT brand for wealth products.
• Group Businesses include:
- Treasury, which is responsible for the management of the Group’s balance sheet including wholesale
funding, capital and management of liquidity. Treasury also manages the interest rate and foreign exchange
risks inherent in the balance sheet, including managing the mismatch between Group assets and liabilities.
Treasury’s earnings are primarily sourced from managing the Group’s balance sheet and interest rate risk
(excluding Westpac New Zealand) within set risk limits;
- Group Technology
1
, which comprises functions for the Australian businesses, is responsible for technology
strategy and architecture, infrastructure and operations, applications development and business integration;
- Core Support
2
, which comprises functions performed centrally, including Australian banking operations,
property services, strategy, finance, risk, compliance, legal, human resources, and customer and corporate
relations; and
- Group Businesses also includes earnings on capital not allocated to divisions, for certain intra-group
transactions that facilitate presentation of performance of the Group’s operating segments, earnings from
non-core asset sales, earnings and costs associated with the Group’s fintech investments, and certain other
head office items such as centrally held provisions.
Revisions to segment results
For Westpac, AASB 9 and AASB 15 were adopted on 1 October 2018 and as comparatives were not restated, line
item movements in our reported results are not directly comparable across periods. In order to provide the
operational trends in business, we have revised the 2018 cash earnings comparatives as if the standards were
adopted on 1 October 2017, except for expected credit loss provisioning which is not feasible. These adjustments
do not impact Full Year 2018 cash earnings but affect individual line items. These adjustments are comprised of:
• Line fees: The Group has reclassified line fees (mostly Business Bank) from non-interest income to net interest
income to more appropriately reflect the relationship with drawn lines of credit;
• Other fees and expenses: The Group has restated the classification of a number of fees and expenses. This
has resulted in the grossing up of net interest income, non-interest income, impairment charges and operating
expenses;
• Card scheme: Support payments received from Mastercard and Visa have been reclassified to non-interest
income and related expenses have been reclassified to operating expenses;
• Merchant terminal costs: Some variable costs related to Westpac’s merchant terminal business have been
reclassified between non-interest income and operating expenses; and
• Interest carrying adjustment: Interest on performing loans (stage 1 and stage 2 loans) is now measured on the
gross loan value. Previously, interest on performing loans was recognised on the loan balance net of
provisions. This adjustment increases interest income and impairment charges.
Internal charges and transfer pricing adjustments have been reflected in the performance of each operating
segment. Inter-segment pricing is determined on an arm’s length basis.
Comparatives have also been restated for:
• recent customer migration and accompanying impacts on divisional income statement and balance sheet; and
• refinement in expense allocations.
1
Costs are fully allocated to other divisions in the Group.
2
Costs are partially allocated to other divisions in the Group, with costs attributed to enterprise activity retained in Group Businesses.
2019 Interim financial report
Notes to the consolidated financial statements
Westpac Group 2019 Interim Financial Results Announcement | 123
Note 2. Segment reporting (continued)
1
The tables present the segment results on a cash earnings basis for the Group:
Half Year March 19
Westpac
BT Financial Westpac New
Consumer Business Group Institutional Zealand Group
$m Bank Bank (Australia) Bank (A$) Businesses
Group
Net interest income 3,882 2,223 297 743 945 299 8,389
Net fee income 311 232 (117) 319 75 6 826
Net wealth management and insurance income - - 242 - 81 - 323
Trading income 44 51 3 357 25 (16) 464
Other income 4 4 14 6 53 20 101
Net operating income before operating
expenses and impairment charges 4,241 2,510 439 1,425 1,179 309 10,103
Operating expenses (1,821) (988) (872) (654) (454) (252) (5,041)
Impairment (charges) / benefits (268) (75) 1 (15) (13) 37 (333)
Profit before income tax 2,152 1,447 (432) 756 712 94 4,729
Income tax expense (638) (434) 127 (210) (188) (87) (1,430)
Net profit attributable to non-controlling interests - - - (3) - - (3)
Cash earnings for the period 1,514 1,013 (305) 543 524 7 3,296
Net cash earnings adjustments - - (5) - (5) (113) (123)
Net profit for the period attributable to
owners of Westpac Banking Corporation 1,514 1,013 (310) 543 519 (106) 3,173
Total assets 394,484 155,067 35,063 99,848 89,510 117,090 891,062
Total liabilities 210,655 111,596 43,752 115,074 78,193 267,857 827,127
Half Year Sept 18
Westpac
BT Financial Westpac New
Consumer Business Group Institutional Zealand Group
$m Bank Bank (Australia) Bank (A$) Businesses
Group
Net interest income 3,760 2,362 302 754 917 375 8,470
Net fee income 340 260 (97) 308 74 8 893
Net wealth management and insurance income - - 836 180 72 - 1,088
Trading income 47 50 (1) 307 30 (14) 419
Other income 5 5 (3) 17 5 27 56
Net operating income before operating
expenses and impairment charges 4,152 2,677 1,037 1,566 1,098 396 10,926
Operating expenses (1,883) (967) (682) (771) (429) (275)
(5,007)
Impairment (charges) / benefits (236) (164) (4) 9 13 14 (368)
Profit before income tax 2,033 1,546 351 804 682 135 5,551
Income tax expense (620) (466) (110) (264) (188) (87)
(1,735)
Net profit attributable to non-controlling interests - - - (2) - -
(2)
Cash earnings for the period 1,413 1,080 241 538 494 48 3,814
Net cash earnings adjustments - - (73) - 3 153 83
Net profit for the period attributable to
owners of Westpac Banking Corporation 1,413 1,080 168 538 497 201
3,897
Total assets 392,494 156,391 34,923 102,513 82,425 110,846 879,592
Total liabilities 212,473 114,098 42,499 126,655 72,077 247,217 815,019
1
The Group has adopted AASB 9 Financial Instruments and AASB 15 Revenue from Contracts with Customers from 1 October 2018.
Statutory comparatives have not been restated. Refer to Note 1 in Section 4 for further detail. However, where applicable, cash
earnings comparatives (excluding expected credit loss provisioning) have been restated to aid comparability. Refer to the cash
earnings policy in Section 1.3.4 for further detail. In addition, during First Half 2019, the Group has made a number of presentational
changes to the Balance Sheet and Income Statement. Both statutory and cash earnings comparatives have been restated. Refer to
Note 1 in Section 4 for further detail.
2019 Interim financial report
Notes to the consolidated financial statements
124 | Westpac Group 2019 Interim Financial Results Announcement
Note 2. Segment reporting (continued)
1
Half Year March 18
[TRUNCATED]
Data sourced from publicly available filings. Our datasets may not be complete. Automated analysis can produce errors. If you believe any data on this page is incorrect, please contact us at hello@nzxplorer.co.nz. For informational purposes only. Not investment advice.