Westpac Bank’s remediation-marred profit slump, announced on Monday, is emblematic of the troubles the big four are facing following the Hayne royal commission and in light of a cooling local housing market.
The $896 million Westpac paid and provisioned for customer remediation during the six months to the end of March – which resulted in a reduced cash profit of $617 million – was front and centre during CEO Brian Hartzer’s explanation of its 22 per cent profit slide.
Within the announcement the bank also revealed its decision to move first to end grandfathered commissions resulted in a $21 million reduction to the bank’s income.
Westpac shares were down more than 1 per cent in line with broader share market trading on Monday.
While Hartzer described the result as “disappointing” and noted the business’s wealth management reset and remediation would continue to be felt, he said the last six months had 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,” Hartzer explained.
Growing remediation costs reached $1.9 billion in the first half, crimping profits across all four banks, according to an analysis by consulting firm, EY.
Overall remediation costs hit $4.8 billion over the last year and half across the big four, driven by misconduct issues in wealth management, EY noted.
“This has been far greater than the initial estimates by the majors and is not the end of the road. On-going investigation into product design and compliance will likely further increase the banks’ remediation burden, putting cost to income ratios under renewed pressure,” Tim Dring, EY Oceania Banking and Capital Markets Leader.
The royal commission has disrupted the banks’ risk appetites and business flows, forcing them to revisit their strategic priorities, Dring noted. The number one priority is to address compliance obligations, as the majors prepare for more intensive levels of regulatory supervision and enforcement from APRA, ASIC and AUSTRAC, he said.
During Monday’s announcement Hartzer described the economic outlook as “subdued”, thanks mainly to the impact of falling house prices on household spending.
The slowing rate of growth in housing lending has impacted all four banks, despite tightened responsible lending and verification criteria, and strengthening capital requirements, Dring noted.
While Dring said that repricing should have supported net interest margin for the majors in the first half of 2019, he added that a combination of aggressive front book pricing and a decline in higher margin lending saw a decline in average net interest margins across the banks.