Items affecting WBC’s First Half 2020 results

ASX
Release

14 April 2020

Items affecting Westpac’s First Half 2020 results

Westpac today announced expected new and increased provisions (excluding impairment
provisions) and asset write-downs totalling around $1,430 million after tax which will
reduce First Half 2020 (1H20) cash earnings
1
. Statutory net profit after tax will also be
reduced by these items.

Westpac is also undertaking detailed analysis to finalise its impairment provisions for
1H20. The 1H20 impairment charge is expected to include a significant collective
provision increase that will lift the Group’s total provision balance in anticipation of credit
losses that it expects to incur from the COVID-19 outbreak. Westpac plans to update the
market once this impairment charge has been finalised and prior to the announcement of
its 1H20 results on 4 May 2020.

Following the $2.8 billion of capital (around 63 basis points to the CET1 capital ratio)
raised in the half, and payment of the final 2019 dividend, Westpac’s CET1 capital ratio
was 10.8% at 31 December 2019. The impact of the items disclosed today on Westpac’s
CET1 capital ratio is estimated to be around 30 basis points, noting that some items have
no impact on capital as they are already capital deductions.

Westpac CEO Peter King said: “Having spent much of the last decade strengthening our
capital we are well placed to respond to the unfolding environment.”

These items, along with their cash earnings impact, include:
• provisions and costs associated with the AUSTRAC proceedings and response
plan of $1,030 million after tax;
• an increase in provisions for customer refunds, repayments and litigation of
around $260 million after tax;
• a reduction in the value of several assets costing around $70 million after tax; and
• costs of changes in the provision of group life insurance of around $70 million
after tax.

Details on each of these items is in Appendix 1.

Peter King said he was committed to fixing the processes that led to the AUSTRAC
proceedings.

“In addition to closing relevant products and recruiting an additional 200 people in
financial crime and compliance, I am putting in place a clearer accountability regime
that will speed up decision making, improve implementation and more clearly define
responsibility and its associated risk management.”


1
For a definition of cash earnings refer to Westpac’s 2019 Full Year Results announcement section 1.3.
Level 18, 275 Kent Street
Sydney, NSW, 2000

Page 2 of 5


These items, and the likelihood of a higher impairment charge, mean that Westpac
expects to report lower cash earnings in 1H20, which will be taken into account when
considering dividends. A decision on 1H20 dividends will be made by the Board as part
of finalising the Group’s accounts and is expected to be announced with Westpac’s 1H20
results.

Changes to the presentation of Westpac’s 1H20 Results

Westpac’s reporting of its 1H20 results will include the following changes:
• the result template will no longer be produced and a release on reporting changes
will not be made for 1H20. The result template typically details the impact of
accounting changes and earnings restatements on prior period results (in an Excel
spreadsheet). Appendix 2 outlines the only change to the presentation of
Westpac’s results for 1H20;
• the investor discussion pack will be streamlined, with increased focus on items of
greater interest, particularly around COVID-19; and
• the Group will conduct its 1H20 results presentation online and by teleconference
rather than in person.



Appendix 1 – Details of major items affecting Westpac’s 1H20 results.
Appendix 2 – Changes in the presentation of Westpac’s results.


For further information:

David Lording Andrew Bowden
Group Head of Media Relations Head of Investor Relations
0419 683 411 0438 284 863

This document has been authorised for release by Timothy Hartin, Group Company Secretary.

Page 3 of 5


Appendix 1 – Details of items affecting Westpac’s 1H20 results.

Cash earnings
impact
Detail
$1,030 million related
to AUSTRAC matters
See next two items below
A $900 million
provision (not tax
deductible) for a
potential penalty
related to the
AUSTRAC
proceedings
Following the proceedings launched by AUSTRAC on 20
November 2019, Westpac has been in discussions and mediation
with AUSTRAC seeking to agree a Statement of Agreed Facts and
Admissions along with a proposed penalty that could be put to the
Court on a joint basis with AUSTRAC.

At the case management hearing on 30 March 2020, the Court
ordered that the parties file a Statement of Agreed Facts with the
Court by 8 May 2020, and a defence in relation to the remaining
matters by 15 May 2020.

Westpac has considered the available information and expects to
make a provision of $900 million for its potential liability in relation
to the AUSTRAC claim. The provision will be taken in
circumstances where there remains considerable uncertainty on
the approach the Court would take to assessing the appropriate
penalty and where there remains a prospect of agreeing a penalty
which could be recommended to the Court on a joint basis (which
the Court would have regard to but not be obliged to accept).

The Court’s decision on an appropriate penalty will involve
balancing many different competing and complex factors and the
exercise of discretion.

The actual penalty paid by Westpac following either a settlement
and joint submission on a penalty, or a hearing, and in each case
as determined by the Court, may be materially higher or lower than
the provision.
Approximately $130
million cash earnings
impact of costs linked
to the AUSTRAC
response plan
On 25 November 2019, Westpac announced its AUSTRAC
response plan to improve its financial crime program, support
industry initiatives to enhance financial crime monitoring and
provide additional support and resources to organisations working
to eradicate child exploitation. The total pre-
tax cost is $160 million
and includes the previously disclosed response plan estimates
($80 million) along with higher legal expenses and additional costs
linked to enhancing the Group’s financial crime program.
Approximately $260
million cash earnings
impact of additional
provisions for customer
refunds, payments and
associated costs and
litigation
The Group has continued to work diligently through a range of
customer remediation activities and has made sound progress
over the last six months. As part of this process the Group has
identified additional provisions (principally related to updated
estimates for previously disclosed matters), higher program costs
and two new items assessed over 1H20. The two new items
relate
to the processing of corporate actions and certain wealth fees.
Most of the provisions are in the Business (including wealth) and
Group Businesses (for Advice) divisions. The main contributors to
the 1H20 provision on a pre-tax basis include:
• ~$105 million in net interest income, mostly due to previously
identified matters relating to refunds to certain business
customers who were provided with business loans where they
should have been provided a loan covered by the National
Consumer Credit Protection Act and the National Credit Code.

Page 4 of 5


• ~$130 million in non-interest income mostly related to:
o Compensation to customers on our platforms (with the
majority in BT Wrap) who were not advised of certain
corporate actions. As these customers may have missed
out on value associated with these actions a
compensating payment is being made.
o Refunds to some BT customers where certain wealth fees
were inadequately disclosed.
• ~$90 million in additional costs for implementing the
remediation program.
• ~$40 million for litigation matters.
Approximately $70
million in other asset
write-downs
COVID-19 has significantly impacted asset values globally and, as
a result, the Group has revalued or reassessed the value of certain
assets. This includes some capitalised software costs and some
physical assets. The pre-tax cost is ~$100 million.
Approximately $70
million relating to
changes to the
provision of group life
insurance
Westpac Life Insurance Services Ltd (WLIS) and BT Super intend
to end their existing relationship, as a result, WLIS will stop
providing group life insurance to BT Super. Following this change,
Westpac has written-off associated deferred acquisition costs and
will incur some transition costs (~$100 million pre-tax, mostly
deducted from non-interest income).

WLIS will continue to provide other selected forms of life and
income protection insurance.


In addition to the above, on 19 February 2020, Westpac indicated that major bushfires
and storms would add around $140 million (net of reinsurance) pre-tax to insurance
claims in 1H20.

Page 5 of 5


Appendix 2 – Changes in the presentation of Westpac’s results

For Westpac’s 1H20 results there is one change to the composition of divisional earnings
following a net movement of approximately 49,000 customers from the Business to the
Consumer division, to better support their needs. This includes moving certain small
business customers, and associated servicing activities. This change will see the
revenues, costs and the associated balance sheet of these customers move into the
Consumer division. This change has no impact on the Group’s results, or balance sheet
but prior period comparative data for the two divisions will be adjusted.

For 2H19, this cohort of customers accounted for approximately $1.3 billion of deposits and
$3.7 billion of lending. This change impacts a number of line items and will involve the
movement of around $42 million in cash earnings to Consumer in 2H19. Comparatives for
1H19 and 2H19 will be restated for this change.

Sections of Westpac’s First Half 2020 Result Announcement that will be impacted by this
change include:

• Section 2: Review of Group operations - Divisional cash earnings summary;
• Section 3: 3.1 Consumer and 3.2 Business;
• Section 4: Note 2 - Segment reporting;
• Section 5: Note 1 - Interest spread and margin analysis; and
• Section 5: Note 9 - Divisional result and economic profit.