westpac · pdf file– term deposits; based on our ... – liquifies the asset side of...
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WestpacActive Management of our
Funding & Capital
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Objectives
u Meet the needs of the franchiseu Low risk profileu Lower cof than our competitorsu Optimum level and structure
Focus of this presentation is wholesale funding and capital
Sep 96 Sep 97 Sep 98 Mar 99TOTAL ASSETS 122.2 118.6 137.9 138.5LiabilitiesRetail Funding 50.2 50.8 61.1 59.5Wholesale Funding 50.7 45.7 49.5 56.0Other 13.0 13.9 18.6 14.3Equity 8.0 8.2 8.6 8.7TOTAL LIABILITIES 122.2 118.6 137.9 138.5
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Strategy
u Retail deposits;– at a minimum maintain share but not at a cost over wholesale funding.– term deposits; based on our current understanding of our cost
structure we would need a 3% increase in volume per 1bp increase in customer rates to break even in EVA terms.
u Wholesale funding;– securitisation– debt markets as a brand franchise– active diversification– strong risk culture, similar to credit, market and operational risk– medium term outcome is lowest cost
u Capital– find the optimum level and structure
• ↑ ROOE• ↑ EPS
4
Discussion: Retail Deposits
Retail Deposits
u Dis-intermediation of bank deposits– Super– Funds Management
u Increase competition– ADIs– Internet
BANKING SYSTEM FUNDING SHORTFALLForecast
1996 1997 1998 1999 2000 2001Non funding loan growth 381 433 473 521 573 630Deposit growth 267 289 291 298 306 314Shortfall 114 144 182 223 267 316Change in shortfall 31 38 40 45 50
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Discussion: Wholesale Funding
u Securitisation
– liquifies the asset side of the balance sheet– issued
$6.90b public$1.85b private$8.75b total
– best international Australian bond issue 1997, 1998• Euroweek
– “ … most market players agreed …. that the deal proved a successful debut”
• Euromoney
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Discussion: Wholesale Funding
Wholesale Funding
u Building the brand
– meet investor demand– generate ongoing participation– active ongoing investor contact
• credit positioning
– intermediary sponsorship• appropriate fee for risk
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Discussion: Wholesale Funding
u Public Transactions– 13% of wholesale funding
• optimal size to open new markets• achieves term preference
– Build the brand• appropriate fees to intermediaries• investor friendly approach to issuance
– fair value/relative value
= Higher cost in the shorter term, yet lower cost in the longer term
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Spread differential between Commerzbank (AA-/Aa3) USD1,000m 5.375% due Feb 04 and WBC (AA-/Aa3) USD500m 5.75% due April 04
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Discussion: Wholesale Funding
u Private placement and continuous debt issuance
– 87% of wholesale funding– lower cost leveraged off the brand
“who they gonna call”– intermediary sponsorship– investor diversification
• flexibility to meet investor preferences anytime anywhere
= Lower cost
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Discussion: Wholesale Funding
Offshore Market Access to > 3 Year Term Debt over the last 3 yearsWBC ANZ CBA NAB
Traditional bank funding investor base – typically money market funds,bank/corporate treasury investorsEuro US$ FRN 4 4 4Euro £ FRN 4Euro € FRN 4 4Institutional & Retail Investor BaseEuro US$ fixed rate u Institutional u Retail
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Euro € fixed rateEuro MBS 4Global MBS 4Japanese retail (Uridashi) 4Swiss Retail (Fixed CHF) 4Benelux retail (Euro A$/NZ$) 4 4Yankee market 4 4 4 4
u Diversified sources; “anytime, anywhere”= lower risk
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Discussion: Wholesale Funding
u Managing the term
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Vo
lum
e A
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bio
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1
2
3
4
5
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7
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Mo
nth
s
Products < 1 Yr Products > 1 Yr Average Maturity Monthly Refinancing Task
99%
1%
93%
7%
85%
15%
76%
24%
79%
21%
Sep 95 Sep 96 Sep 97 Sep 98 Mar 99
u Longer term = lower liquid assets
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Discussion: Wholesale Funding
u Market feedback– loose bonds kill investor appetite– over reliance in one market may mean overpaying in another– lower number of intermediaries– selected external testimonials
• Independent market awards:- Australian Borrower of the Year 1998 - Euromoney Magazine- Financial Institution Borrower of the Year 1997 - Euroweek Magazine (as voted by market intermediaries)- Australian borrower of the Year 1996 - Euromoney Magazine
• Deal specific commentary reflecting market reception of public deals:- “Westpac one of the market’s favourite financial credits”Euroweek April 1999
- “…and Westpac is now established as a name that sells…”International Insider Bondwatch Screen April 1999
- “…its strategy of spreading its funding across different sources means that it never overreaches itself in any single market, and it is able to maintain something of a rarity value premium.”Euroweek, January 1999
Summaryu Good strategy can buy you lower risk and overall lower cost wholesale funding
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Capital: The story so far
u Strong equity formation through– pricing for risk– managing the spread
Interest Margins _ Group
2.00%
2.50%
3.00%
3.50%
4.00%
WBC ANZ CBA NAB SGB
1H 1997
2H1997
1H1998
2H1998
1H1999
Interest Spreads - Group
2.00%
2.20%
2.40%
2.60%
2.80%
3.00%
3.20%
WBC ANZ CBA NAB SGB
1H 1997
2H1997
1H1998
2H1998
1H1999
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Capital: The story so far
– Impact of buybacks
In total– total consideration for volume bought back = $2.863b– 2.863b x .0475 = $136m per annum ($87m NPAT)Per 1% of equity ratio (as at 1H99)– Tier 1 = -$48m Net Interest Income
-$31m NPAT-.048% margin
– TOE/TA = -$66m Net Interest Income-$42m NPAT-.065% margin
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Capital: The story so far
u Sustainable growth in equity through
– acquisitions that improve and protect franchise
– dynamic provisioning
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Capital: The story so far
– organic business growth
– acquisitions
– on market buyback
AvgStart Sought(m) Actual(m) Buyback % of mktDate Price
04 Apr 96 95 95 5.74 4818 Nov 96 85 31 7.17 1319 May 97 50 22 8.32 1417 Nov 97 85 80 10.04 3022 May 98 60 55 9.99 1703 Mar 99 50 50 11.31 33
332.5 8.61
Our growth in equity has been applied to:
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Capital: The story so far: Results1H
97
2H
97
1H
98
2H
98
1H
99
638
$701m
Profit*
36.3c
EPS* Dividends
16.4%
ROOE*
653 66
6 676
1H
97
2H
97
1H
98
2H
98
1H
99
34.6
33.5
34.5
1H
97
2H
97
1H
98
2H
98
1H
99
19.0
23.0c
20.0 21
.0 22.0
1H
97
2H
97
1H
98
2H
98
1H
99
16.9
17.1
15.5
15.6
* Return on Operating Equity (Pre abnormals)
33.2
58.7%
Expense: Income Ratio
1H97
2H97
1H98
2H98
1H99
60.8
60.5
59.1
57.8
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Capital: Is it enough?
u Yes, but
– competitor activity– business changes
• capitalisation of NZ• franchise value in NZ
– advent of Tier 1 hybrids• why did we wait?
– stakeholders re-evaluation of equity required to maintain franchise
• APRA• rating agents• economic equity
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Capital: In future, what are the options to apply growth in equity:
Constraint: Activity must generate returns in excess of our cost of capital (approx. 11%)
u Growth– retail assets
• mortgages - 1 in 4 for new production– business assets– corporate assets
u Acquisitions
u On market buyback
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Capital: In future, what are the options to apply growth in equity:
u Off market - Put Back Option
– offer to purchase say 73m shares (1 for 20)– premium between 7% and 10%– equal access– listed– shareholders who do not deliver shares may
sell their right on market or their right will be auctioned and the proceeds forwarded to them
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Capital: In future, what tools could we use to grow the equity base
u Constraints:– source equity when its cheap ie. when you don’t need it– create diversified sources
u Securitisation– retail MBS– CLO
u Tier 1– US TOPrS– Australian Tier 1
u Common equity with a twist
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Capital: Tools: Tier 1
u US TOPrS
– USD 300m (Greenshoe USD 22.5m, Total USD 322.5m)– 8% Fixed– perpetual– swaps into < Libor + 70
u Australian Tier 1
– up to AUD 500m– BAB +[125]– perpetual
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Capital: Tools: Common equity with a twist
u NZ class
– capitalise NZ operations– significant franchise value– would be the only listed banking stock– would trade same as Westpac
ordinaries adjusted for currency
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Potential Outcomes
u Issue of up to AUD 1.6b in new equity
u Tier 1 target of 6% - 6.5%
u Potential capital structureCommon 5.1%NZ Class 0.5Ordinary 5.6Hybrid 0.9
6.5
u EPS positiveROOE positive
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