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One of Australia's leading banks is turning to the share market for $2.5 billion of extra breathing room so it can comply with higher capital ratio standards put in place in 2017.
Westpac (ASX: WBC) shares entered a trading halt before announcing its net profit after tax (NPAT) for FY19 was down 16 per cent at $6.78 billion, and that $2.5 billion in capital would be raised at a 6.5 per cent discount to the last trading price.
WBC shares have risen almost 20 per cent since reaching a six-year low in December, making now as good a time as any for the Sydney-based bank to raise cash and buffer itself against the Australian Prudential Regulation Authority's (APRA) "unquestionably strong" CET1 capital ratio benchmark of 10.5 per cent.
CEO Brian Hartzer claims the raising also creates flexibility for changes in capital rules as well as for potential litigation or regulatory action.
Westpac's raising will include a $2 billion institutional share placement at $25.32 per share, to be followed by a non-underwritten share purchase plan targeting $500 million.
"Given our priority for balance sheet strength and our goal to support customers' growth, we are seeking to raise approximately $2.5 billion in capital to provide an increased buffer above APRA's unquestionably strong benchmark."
The company has also cut its second half dividend to 80 cents per share - a decision Hartzer says wasn't easy.
"However, we felt it was necessary to bring the dividend payout ratio to a more sustainable medium-term range given the capital raising and lower return on equity," he says.
The group's profit drop for FY19 was mostly driven mostly by customer remediation, but also a "challenging, low-growth, low interest rate environment", according to Hartzer.
Hartzer says it was a disappointing year, and if it weren't for the aforementioned provisions cash earnings would have only been down 4 per cent.
The remainder of the fall can be explained a reduction in wealth and insurance income from the exit of Westpac's financial planning business, higher insurance claims, and the impact of regulatory changes on revenue.
"Importantly, 2019 has also been a watershed year where we've acted decisively to respond to the challenging conditions," he says.
"We've progressed the implementation of a number of recommendations from the Royal Commission and our Culture, Governance and Accountability (CGA) self-assessment, and continued our focus on putting things right for customers.
"This year our productivity savings increased 33 per cent to $405 million, and we reduced our FTE (full time equivalent) by 5 per cent, or approximately 1,700 people."
The executive highlights the establishment of a remediation hub to speed up the process of refunding customers with around $350 million in refunds paid to more than 500,000 customers since 2017.
"Credit quality remains sound and impairment charges remain low at 11 basis points of loans. Nevertheless, we have seen a small rise in 90 day mortgage delinquencies over the year, in part due to low wage growth and slowing economic activity," he says.
"70% of our Australian home loan customers are ahead on their repayments including offset accounts."
"We have also invested in a range of fintech partnerships that open up opportunities in an increasingly digitised world."
As part of this, Westpac expects to make a minority equity investment in UK-based cloud banking technology provider 10x Future Technologies Holdings Limited.
"This initiative builds on the significant investment we have made and will continue to make in modernising our platforms, including the Customer Service Hub and Panorama. Together this will mean we have the right systems to meet changing customer needs now and in the future.
"We're preparing for our digital future by investing in a new digital-only banking platform that will complement our existing banking businesses.
"This will initially operate a 'bank-as-a-service' model and we intend to bring new digital products and services to market through fintech and institutional partners."
Hartzer claims Westpac is "number one or two" in market share across all its major segments and the franchise is in good shape.
"We expect $500 million of productivity savings in FY20 as well as another $200 million from the Wealth reset, including the exit of our financial planning business.
"This will be partly offset by incremental spend on improving risk management over the next two years."
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