2006 first half results - westpac€¦ · (133) (13) 58 (43) 85 1,834 4 46 48 43 1,604 4 1400 1500...

2006 First Half Results

4 May 2006

2006 First Half Results

David Morgan Chief Executive Officer

4 May 2006

2006 Interim Results3

Strong first half performance

up 12%Cash earnings

up 3%Expense growth

56 cents, up 14%Fully franked dividend

up 10%Revenue growth

23%Cash ROE

up 12%Cash EPS

47%, down 300 bpsCost to income ratio


Growth1H05 – 1H06 (%)

12%

20%

(1)%

4%#

Australian retail & BT leading the growth

-100 150 400 650 900

New Zealand

WestpacInstitutional Bank

BT Financial Group

Business &Consumer Banking

1H05

1H06

Cash earnings (A$m)

# New Zealand cash earnings in NZ$


Five main features

1. Revenue led

2. Growth momentum restored

3. High quality

4. Consistency

5. Value to shareholders


Movement in cash earnings ($m)

Revenue driven result

1,344

1,511

402 (64)

18 (148)

(41)

1,200

1,300

1,400

1,500

1,600

1,700

1,800

1H05 Revenue OperatingExpenses

Impairmentlosses

Tax and OEI Hybrid impact /Treasury shares

1H06


Growth momentum restored

0.00

0.25

0.50

0.75

1.00

1.25

1.50Ju

n-0

4

Sep-0

4

Dec-

04

Mar-

05

Jun-0

5

Sep-0

5

Dec-

05

Mar-

06

Australian total credit growth * (multiple of system growth)

* Rolling three month average.


BT – strongly positioned

7

10

31

10

16

Market share(%)

Current shareof new business

5

3

1*

3

2

Rank

212Platforms (Wrap)

--Life and risk

310Broking

315Margin lending

67Corporate super

RankMarket share(%)

Product

Current Australian market share

Source:*BT competitor analysis on rankingPlatforms– S&P Dec 05Margin Lending RBA Dec 05 market share Broking: IRESS Feb 06

Life and Risk: Plan for Life Sept 05; Corp Super: Dexx&r Dec 05


High quality result

• Substantial investment in Reach and Pinnacle.

• Additional front line personnel

• Placing greater emphasis on front line

Investment

IMPACTSTANCE

• Risk indicators remaining within comfortable levels

• Maintain risk disciplinesRisk

• Margin decline within expectations

• Price responsive –meeting not leading the market

• Fees aligned to market – both up and down

Competitiveness


Earnings and Returns

Consistent growth & returns

0

10

20

30

40

50

60

70

80

90

100

2H

00

1H

01

2H

01

1H

02

2H

02

1H

03

2H

03

1H

04

2H

04

1H

05

2H

05

1H

06

0

5

10

15

20

25

30Cash earnings per share (LHS) *

ROE (RHS) *

AGAAP A-IFRS

5 year CAGR 11%

* AGAAP to 30 Sept 2004; A-IFRS from 1 Oct 2005.

Cents %


Dividend per share (cents)

Returning value to shareholders

0

10

20

30

40

50

60

2H00 1H01 2H01 1H02 2H02 1H03 2H03 1H04 2H04 1H05 2H05 1H06

56 cents+14%

5 year CAGR 13%


Strong performance all round

34Expenses %

108Revenue %

1413Dividend growth %

2321*ROE (cash basis) %

1211Cash EPS growth %

1211Cash earnings growth %

1H05 to 1H06

AIFRS

5 year CAGR to

1H06

Reported

* 5-year average

The Details

Philip Coffey Chief Financial Officer

4 May 2006


The reporting approach

• Continue to focus on cash earnings

• Reported - appropriate for assessing cash earnings growth at both group and a business unit level

• Adjusted - appropriate for assessing movements in the profit and loss components

“Adjusted”

“Reported”

A-IFRS excluding AASB 132 &139 where practical, and accounting reclassifications

Full A-IFRS

1H06

A-IFRS excluding AASB 132 &139, and accounting reclassifications

A-IFRS excluding AASB 132 & 139

2H05 1H05


Another consistent performance

Scorecard

7% higher

4% growth

14% growth

6% higher

12% higherCash earnings

Impairment losses

Expenses

Non-interest income

Net interest income1

Adj

uste

dR

epor

ted

1 After tax equivalent gross-up


Revenue productivity driving earnings

HybridsTax & OEI

Impairment losses

120(7)019%11%Revenue

4%Expenses

(4)3%Expenses

12(3)316%10%Revenue

Cash earnings growth

Contribution to earnings growth (%)Core

earnings growth

% Growth 1H05-1H06

Rep

orte

dA

djus

ted

0

5

10

15

20

2H03 1H04 2H04 1H05 2H05 1H06

Revenue growth

Expense growth

Revenue and expense growth (% change on pcp)

• Additional tax provision• Run-off of NZ Structured

transactions• Higher life company tax


Revenue quality - looking beyond the top line

% Change1

5%

5%

0%

2H05 –1H06

-(13)-JDV Profit

(2)(140)4Net accounting changes & Epic

4,359

(9)

(7)

(6)

(36)

18

4,412

4,552

2H05

4,595

-

-

(10)

(32)

8

4,629

68

4,563

1H06

11%4,165Adjusted operating income

Remove AASB 132/139

(2)NZ$ Impact2 gain / (loss)

(9)Mortgage broker amortisation

(7)Private equity business

(5)Property sales

(28)Fair value of securities portfolios

4,114

4,161

1H05

12%

10%

1H05 –1H06

Core operating income

Reported operating income

$m

1. Reported basis2. Net of hedges

Normalising for above trend results in Treasury and Financial Markets revenue growth would be 9%


Cash earnings 1H05 – 1H06 ($m)

Half on half movements

1. Adjusts for one-offs in prior periods

9%3%

5%7%Normalised1

3%9%Reported

2H05-1H061H05-2H05% change in cash earnings

1,344

1,4601,511

(74)(46)

(46)217

(127)(3)24(25)247

1100

1300

1500

1700

1H05

Revenues

Expenses

Impairm

ent losses

EpicOther

2H05

Revenues

Expenses

Impairm

ent losses

Other1H06


Asset growth driving net interest income

• Fully adjusted1 net interest income increased 6%

• Solid balance sheet growth with improving momentum:

- 8% growth in adjusted average interest earning assets

• Adjusted margin 5 bps lower:

- 3bps decline in spread

- 2bps decline in free funds benefit

2,557

2,860

136

57

65

172

(38)178

2,200

2,400

2,600

2,800

3,000

1H05 BalanceSheet

Growth

Spread Hybrids FreeFunds

AASB132/139

adj.

1H06

Net interest income analysis ($m)

Tax equivalent gross-up

1 Adjusted for tax equivalent gross-up and AASB 132/139


Loan and deposit growth

89 9296

103 105

136

147 146150 154

0

20

40

60

80

100

120

140

160

1H04 2H04 1H05 2H06 1H06

BCB and NZ Total deposits

Deposits ($bn)Loans excl NZ Structured Finance ($bn)

174187

194203

215

0

50

100

150

200

250

1H04 2H04 1H05 1H05 1H06

11% 6%

9%


Group margins 1H05 – 1H06 (%)

Analysis of margin movements

2.44%

2.39%2.40%

(1bps)

5bps1bps

(9bps)

2.2

2.3

2.4

2.5

1H05 Asset /LiabilitySpread

Asset /Liability

Mix

Other Adjusted1H06

AASB132/139

1H06

• Adjusted margin decline 5bps

• Major impacts on margins:

- Treasury +2bps

- Financial markets +5bps

- NZ Structured Fin -3bps

• Amending for these items the margin decline is consistent with medium term expectations


Non-interest income analysis

Non-interest income movement 1H05 – 1H06 ($m)

14%

1,703

(133)(13)

(43)58

1,83485

446

48

43

41,604

1400

1500

1600

1700

1800

1900

2000

1H05 Accountingreclass.

FinancialMarkets

BTFG Cards High YieldSecurities &Inv. GradePortfolio

Other Adjusted1H06

Policy-holder tax recoveries

2003 TPSreval

Treasuryshares

AASB132/139 adj.

1H06


Expenses – continued tight management

3.12,1352,071Reported expenses

61,1651,095Salary and other staff expenses

(2)227231Equipment and occupancy

(0)743745Other

340bps46%50%Adjusted cost to income ratio

2,134

2

0

0

(3)

1H06

3.5

%Change

AASB 132/139 adjustments:

(8)Consolidation of Epic

(2)Consolidation of the Life Company MIS

0Translation of NZ$ expenses to A$

2,061Adjusted expenses

1H05$m


Capitalised software growth easing

439447

409

69112 (77)(74)

300

350

400

450

500

550

1H05 2H05 1H06

AmortisationNet new investmentCapitalised software balance

Capitalised software ($m)

241775Connect@Westpac

447

36

117

46

9

22

76

34

91

Sep 2005

439

34

118

43

6

19

83

31

82

Mar 2006

408

33

101

52

11

19

66

34

85

Mar 2005

5

3

3

3

3

3

3

3

Amort-isation period (years)

Standardised platform (One Bank)

Institutional Bank

Business loan origination (Pinnacle)

Customer relationship management (Reach)

Product enhancement

Channel development and distribution

Total

Teller platform, NZ

Other – Australia & NZ

Capitalised software -major projects ($m)


Credit charges increasing with loan growth

166 166189

102

41 4114

77

127

91

0

50

100

150

200

250

1H04 2H04 1H05 2H05 1H06

Collective provision

Individually assessed (net of write-offs and recoveries)

Impairment losses on loans ($m)


Asset quality remains positive

Consumer - 90 day delinquencies (%)

0.82

1.07 1.02 0.96

0.71

0.89

0.23 0.15 0.15 0.16 0.20 0.24

0.0

0.5

1.0

1.5

2001 2002 2003 2004 2005 1H06

Consumer unsecured Housing

Impaired assets ($m)

589

681 671

489 471

379

444

386

240290

0

100

200

300

400

500

600

700

800

1H04 2H04 1H05 2H05 1H06

Gross impaired assets Net impaired assets

Impaired assets declining Delinquencies heading to long run averages

Aust. Business Banking - 90 day delinquencies (3 month moving average) (%)

0.50

0.750.90

1.27

0.570.48

0.0

0.5

1.0

1.5

2001 2002 2003 2004 2005 1H06

Aust. Business Banking

8yr average

10yr average


BCB – growth momentum enhanced

• Solid performance with volume growth skewed to latest half

• Strong consumer result, slower in business

• All portfolios close to, or above system, except SME

• Margins 11bps lower

• Modest expense growth despite front-line investment

12

(16)

(18)

9

2

(3)

8

%Rptd

842

(368)

(124)

1,334

1,233

547

2,020

1H06

5Net interest income

(5)Impairment losses

12Cash earnings

(16)Tax & OEI

11Core earnings

2Operating expenses

12Non-interest income

%Adj$m


Housing loan growth back on track

3rd party percentage of new lending mortgages (%)

Spreads down around 4bps from 1H05 to 1H06

Selected tactical pricing initiatives

Uplift in broker sales - averaging 38% of total drawdowns over the half

More active broker engagement

Productivity1 increased by 31% from March 2005 to March 2006

Implemented a new sales management program, ‘Westpac Way’

OutcomeInitiative

1. Average drawdown volumes in $ per Home Finance Manager2. Westpac rolling annual growth as a % of RBA Housing credit aggregates

0

10

20

30

40

Oct

-04

Nov

-04

Dec

-04

Jan-

05

Feb

-05

Mar

-05

Apr

-05

May

-05

Jun-

05

Jul-0

5

Aug

-05

Sep

-05

Oct

-05

Nov

-05

Dec

-05

Jan-

06

Feb

-06

Mar

-06

0.2

0.4

0.6

0.8

1.0

1.2

Mar

-00

Sep

-00

Mar

-01

Sep

-01

Mar

-02

Sep

-02

Mar

-03

Sep

-03

Mar

-04

Sep

-04

Mar

-05

Sep

-05

Mar

-06

Westpac mortgage growth as multiple of system2


BCB Business lending picking up

• Growth in loans and acceptances 11%

- Strong gains in middle markets

- Small business lending growing slower

• Growth skewed to late in the period with strong pipeline of deals

• Modest spread compression

• Pinnacle embedded and delivering

1 Small and medium business lending

^ Spread in 2H04 impacted by repurchase of portfolio of equipment finance loans under the terms of the sale of AGC to GE Capital Finance in 2002

A-IFRS AdjustedAGAAP

2.11

1.78

2H05

2.072.152.02^2.16Equipment Finance

1.751.781.801.79Business

1H061H052H041H04Product spreads1

Business net loans and acceptances ($bn)

38.139.0

39.740.9

42.2

30

32

34

36

38

40

42

44

Mar-05 Jun-05 Sep-05 Dec-05 Mar-06


Deposits market undergoing structural change

• Growing deposits in line with bank system growth

• Portfolio composition is undergoing significant change with most growth in: - Flat fee transaction account

(Westpac One)

- High interest online savings account (Max-i Direct)

• Max-i Direct growth has impacted margins, although partially offset by rate movements on other savings accounts

BCB total deposits ($bn)

73 7584 87

79

0

20

40

60

80

100

1H04 2H04 1H05 2H05 1H06

1 Excludes working capital

A-IFRS AdjustedAGAAP

1.85

2H05

1.831.861.881.90Savings & investments1

1H061H052H041H04Product spreads


WIB – solid underlying performance

• Cash earnings decline impacted by:- Run off of NZ structured

finance transactions- Run down of Quadrant private

equity business- Lower credit spreads and

lending fees

• Excluding structured finance cash earnings up 26%:- Strong financial markets- Transactional banking growth- Fair value of investment

grade portfolio1926199

Cash earnings excl. SF

(1)

17

(27)

(3)

0

0

(5)

%Rptd

241

(91)

(38)

370

282

424

228

1H06

(18)Net interest income

(47)Impairment losses

(5)Cash earnings

17Tax & OEI

(5)Core earnings

0Operating expenses

6Non-interest income

%Adj$m


Financial markets

• Strong foreign exchange result given volatility in key currencies

• Other products assisted by energy and equities performance

• Performance within risk tolerance

Financial markets income ($m)

0

50

100

150

200

250

300

1H03 2H03 1H04 2H04 1H05 2H05 1H06

FX Capital Markets Other

Monthly average VaR ($m)

0

3

6

9

12

15

18

Sep03 Mar04 Sep04 Mar05 Sep05 Mar06

Monthly average VaR Board Limit

A-IFRSAGAAP


New Zealand – tougher conditions

4

(3)

42

1

1

(10)

4

%Rptd

230

(110)

(11)

351

(327)

209

469

1H06

2Net interest income

21Impairment losses

4Cash earnings

(4)Tax & OEI

2Core earnings

1Operating expenses

(2)Non-interest income

%AdjNZ$m

• Balance sheet growth in line with system:

- Housing up 13%

- Business up 12%

- Deposits up 8%

• Significant margin decline from fixed / floating housing loan mix

• Fee income lower from customer switching

• Expenses under control


New Zealand – addressing the challenges

• Switch from floating to fixed rate housing lending abating:

- Caused 15bps housing spread decline

- Limited future margin impact

• Customers becoming more responsive to fees has led to a decline in non-interest income:

- New system to highlight cross-sell opportunities

- Review of product features/ pricing

WBC housing margin vs fixed/housing ratio (%)

55

60

65

70

75

80

85

90

Sep-04 Dec-04 Mar-05 Jun-05 Sep-05 Dec-05 Mar-06

Fixed/Total Housing Ratio

Industry average fixed rate lending ratio


BT Financial Group

• Solid revenue growth from:

- Above market growth in FUA

- Favourable equity market conditions and excellent investment performance

- Strong growth in margin lending

• Life company tax changes increasing tax expense

• Planner productivity up 29%

20

(14)

28

(2)

13

%Rptd

165

71

236

265

501

1H06

13Operating income

22Cash earnings

(52)Tax & OEI

29Core earnings

(2)Operating expenses

%Adj$m


Group business unit

• Higher earnings from Treasury, up $63m

• Increase in tax provisions by $61m

17(13)Cash earnings

(25)

(124)

108

(29)

137

1H06

(96)

(48)

(45)

(6)

(39)

1H05

Operating income

Net profit

Tax & OEI

Core earnings

Operating expenses

$m


Strong capital generation

• $580m in capital generated over half

• Strong capital position has supported:- $1bn buy-back- Uplift in dividends

• A-IFRS adjustments from July 06 manageable. Inclusion of these adjustments at 31 March 06 (without transition) would see: - ACE ratio of 4.7% - Tier 1 ratio of 6.5%

• We are still discussing potential transition arrangements and possible changes to target ranges

5.4%5.1%15bps

15bps

(55bps)

(36bps)

(56bps)87bps

4.50

5.00

5.50

6.00

6.50

Sep-0

5

Cash

Earn

ings

Div

idends

Busi

ness

Applic

atio

n

Buyb

ack

s

Capita

lIs

sued

Oth

er*

Mar-

06

*Includes movements in the foreign currency translation reserve and deferred tax balances

Capital ratios and target ranges (%)

Movements in ACE ratio (%)

4.0

5.0

6.0

7.0

8.0

Mar-01

Sep-01

Mar-02

Sep-02

Mar-03

Sep-03

Mar-04

Sep-04

Mar-05

Sep-05

Mar-06

ACE Tier 1


Higher dividend payout

• Absorb some movement in payout ratio given earnings volatility and A-IFRS

• Pay-out ratio

• General principle is to neutralise new share issuance although some dilution tolerated to utilise franking credits

• New share issues

• Only pay fully franked dividends• Franking

• Deliver dividend increase each half• Dividend path

• Seek to hold capital ratios within target ranges

• Capital

Current approachFactor


Continuing to perform at upper end of sector

Leading peers14%Dividend growth

Restoring momentum11%Growth in loans and acceptances1

Percentage points7Revenue / expense growth differential

Leading peers23%Cash return on equity

Double digit12%Cash earnings per share growth

Ad

just

edR

epo

rted

1. Excluding NZ structured finance transactions

Outlook

David Morgan Chief Executive Officer

4 May 2006


Economic environment sound

• Global growth above par

• Headline inflation boosted by rising energy prices, but core inflation still contained

• Unemployment at 30 year lows

• Expansion continues in Australia

• A period of consolidation in New Zealand

Annual GDP (Calendar years %)

Annual CPI (Calendar years %)

Source: Westpac Economics

0

1

2

3

4

5

2003 2004 2005(e) 2006(f)

GDP (Aust) GDP (NZ)

1.5

2.5

3.5

2003 2004 2005(e) 2006(f)

CPI (NZ) CPI (Aust)


-4

0

4

8

12

16

20

24

Jun-99 Dec-00 Jun-02 Dec-03 Jun-05 Dec-06

-4

0

4

8

12

16

20

24

Aust. Housing Aust. Business Total credit (Aust)

Total credit avg (Aust) Total housing avg (Aust) Total credit (NZ)

Forecasts (To Dec 2007)

Source: RBA, RBNZ, Westpac

Australian and New Zealand credit growth (%)

Credit growth expected to edge lower


Competitive environment remains challenging

• Compliance requirements remain heavy

• International harmonisation challenges under control

• Significant progress on key regulatory issues

• Competitors expanding their footprint

• Price increasingly used to attract business

• Competition for talent is intense

RegulatoryCompetitive


Strong growth platform

• No.1 lead bank share

• Superior transactional banking platform and capability

• Growth potential in Specialised Capital Group / Hastings

Corporate relationships

• Large, high quality customer base with significant untapped potential

• Expanded sales force

• Technology: Reach and Pinnacle

Retail

• Strong wealth platforms

• Top quartile investment performance

• Consistent gains in market share

Wealth


Westpac is in a strong position

• Momentum restored

• Impaired assets lower

• Strong provisioning for all known risks

• Capital ratios strong

^ Underlying EP excludes significant items in 2002

Economic profit ($m)

0

200

400

600

800

1,000

1,200

1H00

2H00

1H01

2H01

1H02

2H02

^

1H03

2H03

1H04

2H04

1H05

2H05

1H06

AGAAP A-IFRS


Confident outlook

• Westpac’s franchise is in excellent health

- Employees - Top quartile commitment

- Customers - Sound progress in customer satisfaction

- Sustainability - Global banking leader

- Financial - Sector leading earnings growthand ROE

Confident that we will continue to deliver strong outcomes for shareholders


Disclaimer

The material contained in this presentation is intended to be general background information on Westpac Banking Corporation and its activities.

The information is supplied in summary form and is therefore not necessarily complete. Also, it is not intended that it be relied upon as advice to investors or potential investors, who should consider seeking independent professional advice depending upon their specific investment objectives, financial situation or particular needs.

The material contained in this presentation may include information derived from publicly available sources that have not been independently verified. No representation or warranty is made as to the accuracy, completeness or reliability of the information.

The financial information contained in this presentation includes non-GAAP financial measures. For a reconciliation of these measures to the most comparable GAAP measure, please refer to our 2006 Reg G (US) financial statements filed with the Securities Exchange Commission and Australian Stock Exchange.

2006 first half results - westpac€¦ · (133) (13) 58 (43) 85 1,834 4 46 48 43 1,604 4 1400 1500...

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