Australia's Westpac raising A$2.5b as profit slumps

Sydney

WESTPAC Banking Corp is looking to raise A$2.5 billion (S$2.3 billion) from shareholders after reporting a 15 per cent slide in full-year cash earnings, cutting its dividend for the first time in a decade and flagging weak trading conditions ahead.

Australia's No 2 lender plans to use the additional funds to meet tougher capital requirements and anticipated legal action related to customer remediation issues that have already led to an almost A$1 billion charge.

"2019 has been a disappointing year," Westpac chief executive Brian Hartzer said. "Financial results are down significantly in a challenging, low-growth, low interest rate environment."

Australia's "Big Four" banks are having to hold more capital at a time of record low interest rates, subdued credit growth and increasing competition.

They also have a collective bill of about A$8 billion in one-off charges to compensate customers for wrongful practices exposed by a government-backed inquiry into the financial sector.

Mr Hartzer, whose bonus was scrapped this year, said operating conditions "will continue to be difficult", flagging weaker expected margins, flat lending volumes, lower fees, and slightly higher expenses.

The capital raising is the largest by a bank since Westpac's own A$3.5 billion raising in 2015, according to Refinitiv data.

Mr Hartzer said the raising, most of which has been underwritten at A$25.32 per share, a 9 per cent discount from Friday's closing price, would provide flexibility amid the subdued economic outlook.

"We just felt it was getting a little tight in terms of the buffer of where we wanted to be," he said.

Westpac slightly missed analysts' expectations with cash earnings of A$6.85 billion for the year ended Sept 30, down from A$8.07 billion a year earlier and below the A$6.89 billion average forecast of six analysts polled by Reuters.

Excluding one-off items like the A$977 million hit for customer remediation, Westpac's cash earnings dropped 4 per cent. Only its New Zealand unit posted a rise, up 3 per cent.

Stressed loans increased by 12 basis points to 1.2 per cent of loans, the highest level since 2016. Expenses rose 3 per cent, despite a 5 per cent cut to the bank's workforce.

Trading in Westpac shares was halted until Tuesday to allow for a bookbuild process.

The stock has gained 13.8 per cent so far this year, recovering much of the value lost during last year's Royal Commission inquiry that uncovered widespread misconduct in the sector.

Westpac's final dividend was cut by 14.9 per cent to 80 cents per share, marking the first cut since 2009 amid the global financial crisis.

"The decision . . . was not easy," Mr Hartzer said. "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."

Given the weak outlook and share dilution from the larger than expected capital raising, analysts said Westpac could need to cut dividends further in the near term.

"It's pretty clear . . . that the dividend will again be under pressure in 2020," Evans and Partners banking analyst Matthew Wilson said.

Fellow "Big Four" bank Australia and New Zealand Banking Group Ltd last week cut its dividend franking tax rebate to 70 per cent for the first time in almost 20 years as it also missed expectations with a 3 per cent drop in second-half profit.

Mr Hartzer's short-term bonus of A$1.61 million was scrapped, although he still received A$4.01 million in salary and vested bonuses.

Westpac last year received a "first strike" when shareholders voted against executive remuneration. Under Australian corporate rules, a "second strike" at the Dec 12 annual general meeting could prompt a board spill. REUTERS