Westpac slashes by $1.3 billion second-half profits

  • By Zilla Efrat

Westpac says its reported net profit and cash earnings in the second half of its 2021 financial year will be slashed by $1.3 billion after-tax due to hefty write-downs, potential litigation and customer refunds.

The biggest write-down in assets was $965 million after the annual impairment test of its institutional division failed to support the carrying value.

“This was partly due to reducing risk in the division through the exit of energy trading, consolidating our Asian operations and reducing our correspondent banking relationships which have all impacted earnings,” Westpac said in a statement yesterday.

It added that medium-term expectations of a prolonged low-interest rate environment, subdued financial markets income and elevated compliance expenses had affected the division’s earnings outlook. This has resulted in a write-down of $1,156 million for assets, which is processed through expenses.

The bank made extra provisions of $215 million for additional expenses in its remediation programs and for litigation matters, including to resolve outstanding investigations should a regulator decide to bring civil penalty proceedings.

On the plus side, Westpac enjoyed a net benefit of $12 million from the release of some provisions in Westpac New Zealand.

Notably, the bank made provisions in case customer remediation was required for disclosures about certain life insurance products issued in the years 2010 to 2017. While its life business was sold to TAL Dai-ichi Life Australia in a deal worth $900 million in August, the bank said it was currently undergoing a complex review where the outcomes are uncertain.

“There is also a risk that the outcomes of the review could affect the financial and/or capital position of the life business,” it said.

Westpac’s results will also be dented by $267 million for the previously announced separation and transaction costs, along with a deferred tax asset write-off, related to the agreed sale of its life business.

Also hurting was $24 million in costs associated with the divestment of the group’s specialist businesses.

These charges were partly offset by a $55 million gain on the sale of the life business and a $54 million reversal of the previous write-downs associated with Westpac Pacific as the sale of the business to Kina Securities would no longer proceed.

In aggregate, Westpac said these items were estimated to reduce the Group’s CET1 capital ratio by around 15 basis points. However, it noted that the write-down of goodwill and capitalised software had no net impact on regulatory capital as they were already capital deductions.