02 May, 2016
Westpac New Zealand: sound performance, strong investment
Westpac New Zealand1 has delivered cash earnings2 of $445 million for the six months ended 31 March 2016, up 2% on the same period last year. The bank has also further strengthened its funding position and increased investment to transform the customer experience, workforce capability and efficiency.
The result was driven by core earnings3 of $625m, almost on par with the same period last year, helped by 3% growth in net interest income. A targeted approach saw total lending lift 8% in the 12 months, to $71.7 billion and disciplined risk management saw impairments down 71% to $9m. During the period Westpac New Zealand invested significantly in the start of a programme to reshape customer service.
Westpac New Zealand Chief Executive David McLean said that the focus has been on maintaining a strong balance sheet in a competitive market while investing to deliver on the bank’s vision of becoming one of the world’s great service companies.
“We continue to build a strong and sustainable business based on quality lending and targeted growth. Our total lending has increased, deposits have grown, our wealth business continues to grow and impairments have been well managed,” Mr McLean said.
“At the same time we have started a programme to transform our customer service over the next two years. This includes upskilling staff, simplifying processes, hiring the best bankers in target markets and ensuring the customer is front and centre of all that we do, whether that is a digital or personal contact.“
LENDING AND DEPOSIT GROWTH
The 8% lift in total lending included a 9% lift in business lending to $26.6b. Agriculture continued to perform well, growing 13%. Westpac is well positioned to work with its dairy farm customers through the current low cycle. In a time of historically low interest rates, Westpac took a measured approach to home loans with a 6% lift to $43.4b.
The 7% growth in deposits4 was mainly in call and transaction accounts, particularly online savings accounts, which increased $1.8b. The deposit to loan ratio increased to 76.6% on FY15 and continues to be peer leading. Funds under Management increased 17% to $7.0b and Funds under Administration increased 5% to $2.0b with the Westpac KiwiSaver5 Scheme rated Platinum by Super Ratings6 for the second consecutive year.
The average number of products per customer is now 3.84, an increase of 4% on FY15, while 52% of customers have four products or more, up 6%.
In an intensely competitive market, an increase in offshore funding costs and customers switching to lower margin fixed rate home loans all contributed to an 8bps reduction in net interest margin to 2.15%.
EXPENSES AND PRODUCTIVITY GAINS
Operating expenses increased $33m which includes costs to support the customer service programme and a brand relaunch. The brand relaunch, featuring Westpac New Zealand ambassador Richie McCaw, had strong cut through with 62%7 of those surveyed able to recall the campaign. Other notable findings included a 5%8 increase in brand consideration amongst non-customers and a 10%9 increase in consideration among under 35 year olds, significantly increasing the pool of New Zealanders who are open to talking to Westpac about their financial needs. Productivity benefits from the on-going investment in digital and self-service channels continue to flow through. The migration of customers to Westpac One - the device agnostic online and mobile banking platform - is now largely completed. Customers continue to embrace the rollout of new features and 32% of all Retail applications now start online, up from 26.6% 12 months ago.
Investment continued in Smart ATMs and the fleet of 160 is now larger than any of Westpac’s competitors, providing customers with the widest coverage of 24/7 capability in the country. Half of Westpac branches now have 24/7 lobbies and 39% of all deposits are taken via a Smart ATM, with one third of those deposits being made after hours.
OUTLOOK – JUGGLING A TWO SPEED ECONOMY
Indications toward the end of the first half of the financial year were that business confidence was starting to wane in some sectors. The outlook for the second half is decidedly mixed with the challenge of a two speed economy likely.
The downturn in the dairy sector will be a significant drag on export earnings, and will weigh on conditions in related industries and those towns and centres that service the agriculture sector. At the same time, a large pipeline of construction work, strong population growth and elevated tourist arrivals are supporting the economy, and historically low interest rates are boosting housing markets in most regions. Offshore, New Zealand will continue to closely watch the economy in China, our largest trading partner, and the uncertainty in Europe.
1 Westpac New Zealand is a management divisional view only, and is not the same as Westpac New Zealand Limited. The financial results of Westpac New Zealand Limited will be available in the Disclosure Statement and a reconciliation between the two results is provided in conjunction with the publishing of the Disclosure Statement.
2 Cash earnings are a measure of performance used by the Westpac Group which adjusts statutory profit for any material items that do not reflect ongoing operations, items that are not considered when dividends are recommended and accounting reclassifications between line items that do not impact reported results. Cash earnings is not a measure of cash flow or net profit determined on a cash accounting basis, as it includes non-cash items reflected in statutory profit determined in accordance with IFRS. Westpac New Zealand's cash earnings result for the half year ended 31 March 2016, as reflected in the Westpac Group's Interim Results Announcement, is equal to statutory profit as none of these cash earnings adjustments impact on Westpac New Zealand's reported results. A reconciliation between Westpac New Zealand’s cash earnings result and Westpac New Zealand Limited’s statutory profit result is provided in conjunction with the publishing of the Westpac New Zealand Limited Disclosure Statement.
3 Core earnings are a measure of performance used by the Westpac Group which is operating income less operating expenses.
4 Deposits are equal to deposits at amortised cost as disclosed in the Westpac New Zealand Limited Disclosure Statement.
5 BT Funds Management (NZ) Limited is the scheme provider and Westpac New Zealand Limited is the distributor of the Westpac KiwiSaver Scheme. A copy of the investment statement for the Westpac Kiwisaver Scheme is available from any Westpac branch in New Zealand or by visiting www.westpac.co.nz.
6. The Westpac KiwiSaver Scheme was rated Platinum by Super Ratings in 2015 and 2016. SuperRatings does not issue, sell, guarantee or underwrite this product. Go to www.superratings.com.au for details of its rating criteria.
Source information from Millward Brown Survey
7 Total sample n=c.500 per month
8 Total sample n=c.364 per month (Monthly comparison February 16 – March 16)
9 Under 35 Non customers of each bank (n=131 - 195) (Quarterly comparison January 16 – March 16)