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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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
2006 Interim Results4
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$m)
# New Zealand cash earnings in NZ$
2006 Interim Results5
Five main features
1. Revenue led
2. Growth momentum restored
3. High quality
4. Consistency
5. Value to shareholders
2006 Interim Results6
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
2006 Interim Results7
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.
2006 Interim Results8
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
2006 Interim Results9
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
2006 Interim Results10
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 %
2006 Interim Results11
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%
2006 Interim Results12
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
2006 Interim Results14
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
2006 Interim Results15
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
2006 Interim Results16
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
2006 Interim Results17
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
$m
1. Reported basis2. Net of hedges
Normalising for above trend results in Treasury and Financial Markets revenue growth would be 9%
2006 Interim Results18
Cash earnings 1H05 – 1H06 ($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
2006 Interim Results19
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 ($m)
Tax equivalent gross-up
1 Adjusted for tax equivalent gross-up and AASB 132/139
2006 Interim Results20
Loan and deposit growth
89 9296
103 105
136
147 146150 154
0
20
40
60
80
100
120
140
160
1H04 2H04 1H05 2H06 1H06
BCB and NZ Total deposits
Deposits ($bn)Loans excl NZ Structured Finance ($bn)
174187
194203
215
0
50
100
150
200
250
1H04 2H04 1H05 1H05 1H06
11% 6%
9%
2006 Interim Results21
Group margins 1H05 – 1H06 (%)
Analysis of margin movements
2.44%
2.39%2.40%
(1bps)
5bps1bps
(9bps)
2.2
2.3
2.4
2.5
1H05 Asset /LiabilitySpread
Asset /Liability
Mix
Other Adjusted1H06
AASB132/139
1H06
• Adjusted margin decline 5bps
• Major impacts on margins:
- Treasury +2bps
- Financial markets +5bps
- NZ Structured Fin -3bps
• Amending for these items the margin decline is consistent with medium term expectations
2006 Interim Results22
Non-interest income analysis
Non-interest income movement 1H05 – 1H06 ($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
2006 Interim Results23
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$m
2006 Interim Results24
Capitalised software growth easing
439447
409
69112 (77)(74)
300
350
400
450
500
550
1H05 2H05 1H06
AmortisationNet new investmentCapitalised software balance
Capitalised software ($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 ($m)
2006 Interim Results25
Credit charges increasing with loan growth
166 166189
102
41 4114
77
127
91
0
50
100
150
200
250
1H04 2H04 1H05 2H05 1H06
Collective provision
Individually assessed (net of write-offs and recoveries)
Impairment losses on loans ($m)
2006 Interim Results26
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 ($m)
589
681 671
489 471
379
444
386
240290
0
100
200
300
400
500
600
700
800
1H04 2H04 1H05 2H05 1H06
Gross impaired assets Net impaired assets
Impaired assets declining Delinquencies heading to long run averages
Aust. Business Banking - 90 day delinquencies (3 month moving average) (%)
0.50
0.750.90
1.27
0.570.48
0.0
0.5
1.0
1.5
2001 2002 2003 2004 2005 1H06
Aust. Business Banking
8yr average
10yr average
2006 Interim Results27
BCB – growth momentum enhanced
• Solid performance with volume growth skewed to latest half
• Strong consumer result, slower in business
• All portfolios close to, or above system, except SME
• Margins 11bps lower
• Modest expense growth despite front-line investment
12
(16)
(18)
9
2
(3)
8
%Rptd
842
(368)
(124)
1,334
1,233
547
2,020
1H06
5Net interest income
(5)Impairment losses
12Cash earnings
(16)Tax & OEI
11Core earnings
2Operating expenses
12Non-interest income
%Adj$m
2006 Interim Results28
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
2006 Interim Results29
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 ($bn)
38.139.0
39.740.9
42.2
30
32
34
36
38
40
42
44
Mar-05 Jun-05 Sep-05 Dec-05 Mar-06
2006 Interim Results30
Deposits market undergoing structural change
• Growing deposits in line with bank system growth
• Portfolio composition is undergoing significant change with most growth in: - Flat fee transaction account
(Westpac One)
- High interest online savings account (Max-i Direct)
• Max-i Direct growth has impacted margins, although partially offset by rate movements on other savings accounts
BCB total deposits ($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
2006 Interim Results31
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$m
2006 Interim Results32
Financial markets
• Strong foreign exchange result given volatility in key currencies
• Other products assisted by energy and equities performance
• Performance within risk tolerance
Financial markets income ($m)
0
50
100
150
200
250
300
1H03 2H03 1H04 2H04 1H05 2H05 1H06
FX Capital Markets Other
Monthly average VaR ($m)
0
3
6
9
12
15
18
Sep03 Mar04 Sep04 Mar05 Sep05 Mar06
Monthly average VaR Board Limit
A-IFRSAGAAP
2006 Interim Results33
New Zealand – tougher conditions
4
(3)
42
1
1
(10)
4
%Rptd
230
(110)
(11)
351
(327)
209
469
1H06
2Net interest income
21Impairment losses
4Cash earnings
(4)Tax & OEI
2Core earnings
1Operating expenses
(2)Non-interest income
%AdjNZ$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
2006 Interim Results34
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
2006 Interim Results35
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
2006 Interim Results36
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
2006 Interim Results37
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
2006 Interim Results38
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
2006 Interim Results39
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
2006 Interim Results41
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)
2006 Interim Results42
-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
2006 Interim Results43
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
2006 Interim Results44
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
2006 Interim Results45
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
2006 Interim Results46
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
2006 Interim Results47
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.
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