An unorchestrated 'litigation lot' of liabilities: Part 1
Quote:
Originally Posted by
macduffy
ABC"s comment:
https://www.abc.net.au/news/2019-11-...tions/11738642
I take your point, percy, but confess that I'm tempted. Remember Westpac's lending crisis of the late 80's/early 90's when they were forced into a heavily discounted rights issue? Fortunes were made then...…….
I am ashamed to say I am a Westpac shareholder, who has taken his eye off the ball. I have to admit that most of my investment energy is expended on the NZX and my other holdings tend to be 'buy and hold' investments representing sectors I cannot invest in via the NZX. But I guess that is no real excuse.
'The bank that may have facilitated pedophiles'
doesn't sound like a great marketing campaign line.
AUSTRAC (The Australian Transaction Reports and Analysis Centre) is investigating and
"Any enforcement action against Westpac may include civil penalty proceedings and result in the payment of a significant financial penalty which Westpac is currently unable to reliable estimate." (AR2019 p255)
But perhaps even more damaging financially and reputationally is the less headline grabbing legal issues that relate to the way that Westpac's own initiated business practices permeate their core business. Westpac disclose the 'live legal cases' they now face in AR2019, p255 to p256:
1/ ASIC (Australian Securities and Investigation Commission) March 2017 case against contraventions of the 'National Consumer Credit Protection Act'. against certain interest only home loans. The case has been dismissed on 13-08-2019 but ASIC has appealed. No provision has been recognised in WBC accounts in relation to this matter.
2/ ASIC December 2016 case against personal advice given in contravention of a number of Corporation Act 2001 provisions, largely in relation to the consolidation of Superannuation accounts at 'BT Funds Management Limited' and 'Westpac Securities Administration Limited'. On 28-10-2018 the Full Federal Court ruled in ASICs favour. The matter has yet to be remitted for penalty. No provision has been recognised in WBC accounts in relation to this matter.
3/ ASIC August 2016 case filed in the United States against Westpac and other international banks alleging misconduct in relation to the bank bill swap reference rate. The original case was dismissed on a technicality, but it was refiled in revised form in May 2019. No provision has been recognised in WBC accounts in relation to this matter.
4/ An October 2017 class action was filed in the Supreme Court of Australia against Westpac and Westpac Life Insurance alleging advisors breached their fiduciary duties by not acting in the best interests of their clients. These actions are currently stayed by the courts as a result of a procedural matter. No provision has been recognised in WBC accounts in relation to this matter.
5/ A February 2019 class action was filed against Westpac, claiming that Westpac did not comply with responsible lending obligations for certain home loans that it should have assessed as unsuitable. No provision has been recognised in WBC accounts in relation to this matter.
6/ A September 2019 class action against 'BT Funds Management Limited' (BTFM) and 'Westpac Life Insurance Services' (knowingly concerned with the former). It is alleged that BTFM charged excessive fees and mismanaged investments. No provision has been recognised in WBC accounts in relation to this matter.
Note that the common thread amongst all of these court cases is that no specific provision has been made for any of them! This is not because Westpac believes they have no chance of succeeding. Item 2 has already been lost after all. It is because estimating any consequent losses is too difficult.
I wonder if, nevertheless, the recent capital raising was an attempt to provide some provisioning against all of this, albeit in an as yet unformalised and unallocated way?
SNOOPY
The cost of a deposit guarantee: Part 1
Quote:
Originally Posted by
Snoopy
Note that the common thread amongst all of these court cases is that no specific provision has been made for any of them! This is not because Westpac believes they have no chance of succeeding. Item 2 has already been lost after all. It is because estimating any consequent losses is too difficult.
Having said Westpac have shied away from estimating some serious legal downside costs, I noticed one area of small print where they have put their hand up. From p257 AR2019
"The Financial Claims Scheme (ADIs) Levy Act 2008 provides for the implementation of a levy to fund the excess of certain APRA FCS costs connected to an ADI (Authorised Deposit taking Instituition) including payments by APRA to deposit holders in a failed ADI. The levy would be imposed on liabilities of eligible ADIs to their depositors and cannot be more than 0.5% of the amount of these liabilities."
This money will go into a pot that will guarantee bank depositors in approved ADIs up to $250,000 worth of their deposits back (significantly better than the $50,000 ceiling guaranteed in NZ I note), should their ADI get into trouble.
Now for those that get confused by 'banker speak', it is we depositors when we stick our money in the bank that create this kind of bank liability. So it is we depositors who ostensibly fund this, even though it is up to the bank to collect this money from us.
The paragraph ends
"A contingent liability may exist in respect of any levy imposed under the Financial Claims Scheme."
This implies that this levy, despite being legislated for, has not been collected. But if the Federal Government wanted to collect this levy, how much would Westpac have to pay annually? If we take the amount of money in the Australian arm of the business from customer deposits as a guide, then I calculate an annual levy of up to:
0.5% x $464,254m = $2,321m per year
Yes that is right. $A2.3 billion each and every year as a levy (c.f. cash profit for FY2019 of $6.849billion) ! If ever there was a hidden sword of damocles hanging over the Westpac business model, this must be it. But will the Federal government ever implement a levy as draconian as this? And will such a levy in implemented be an annual charge or a one off?
SNOOPY
The cost of a deposit guarantee: Part 2
Quote:
Originally Posted by
Snoopy
"A contingent liability may exist in respect of any levy imposed under the Financial Claims Scheme."
This implies that this levy, despite being legislated for, has not been collected. But if the Federal Government wanted to collect this levy, how much would Westpac have to pay annually? If we take the amount of money in the Australian arm of the business from customer deposits as a guide, then I calculate an annual levy of up to:
0.5% x $464,254m = $2,321m per year
Yes that is right. $A2.3 billion each and every year as a levy (c.f. cash profit for FY2019 of $6.849billion) ! If ever there was a hidden sword of damocles hanging over the Westpac business model, this must be it. But will the Federal government ever implement a levy as draconian as this? And will such a levy in implemented be an annual charge or a one off?
A bit more on this 'Financial Claims Scheme' they have in Australia
https://www.apra.gov.au/financial-cl...-policyholders
From the above link:
-------
How is the scheme funded?
If the Government activates the FCS, initial FCS funding will be provided by the Government in order to facilitate timely payments to account holders.
Amounts paid under the FCS and associated administration costs would then be recovered through the liquidation process through a priority claim. Any shortfalls through the liquidation would subsequently be recovered by the Government through an industry special levy.
------
It does look like this levy is an 'after the event' procedure. If an Approved Deposit taking Institution was liquidated, then:
1/ Government pays out deposit holders. (Up to $250k under the one banking licence in trouble).
2/ Government liquidates the ADI to recover its money.
3/ Government imposes an industry levy to recover any shortfall.
So this FCS levy that might be applied to Westpac would be to pay out depositors from another industry player that has been liquidated. As Westpac shareholders, this is outside our control unless of course it is Westpac itself that end up in liquidation. But as Westpac shareholders, we will already be 'down the dunny' by that stage: no 'levy' to worry about!
SNOOPY
An unorchestrated 'litigation lot' of liabilities: Part 2
Quote:
Originally Posted by
Snoopy
Note that the common thread amongst all of these court cases is that no specific provision has been made for any of them! This is not because Westpac believes they have no chance of succeeding. <snip> It is because estimating any consequent losses is too difficult.
I wonder if, nevertheless, the recent capital raising was an attempt to provide some provisioning against all of this, albeit in an as yet unformalised and unallocated way?
I have done a bit more homework on this topic.
From AR2019 p84, the 'non-interest income' decrease year on year is explained.
There was a "$657 million decrease from provisions for estimated customer refunds , payments, associated costs and litigation."
So although there is no specific provision for the avalanche of court cases pending against Westpac, there is $657m available already to make litigation related payments.
Specifically for Wealth Management and Insurance we learn that a separate $531m has been set aside as
"...additional provisions for estimated customer refunds, payments , associated costs, and litigation (mostly related to financial planning)."
That all adds up to a reduction in non interest income for FY2019 of:
$657m + $531m = $1,188m
Separate to all of this, there has been much scrutiny of the payment of senior managers including the CEO. From AR2019 p56:
"Cash earnings were also impacted by provisions for estimated customer refunds, payments associated costs and litigation, as well as costs associated with the restructuring of the Wealth business. Excluding the impact of these items Westpac's cash earnings were $7,979m."
From AR2019 p2 the declared cash earnings for FY2019 were $6,849m. The difference in these two figures indicates the one off provisioning against the now largely discontinued wealth business.
$7,979m - $6,849m = $1,130m
This is $58m less than the total restructuring costs I calculated above. My explanation for this discrepancy is that, of the $531m set aside against 'Wealth Management and Insurance', $58m must have been for the continuing 'Insurance' side of 'Wealth Management and Insurance'.
It may end up not being enough. But $657m + $473m = $1.130 billion set aside over the last financial year to address these remediation and litigation issues is a significant start. More detailed information of how that $1,130m was accounted for over FY2019 may be found in AR2019 p95.
SNOOPY
The cost of a deposit guarantee: Part 3
Quote:
Originally Posted by
Snoopy
A bit more on this 'Financial Claims Scheme' they have in Australia
https://www.apra.gov.au/financial-cl...-policyholders
From the above link:
-------
How is the scheme funded?
If the Government activates the FCS, initial FCS funding will be provided by the Government in order to facilitate timely payments to account holders.
Amounts paid under the FCS and associated administration costs would then be recovered through the liquidation process through a priority claim.
Any shortfalls through the liquidation would subsequently be recovered by the Government through an industry special levy.
------
It does look like this levy is an 'after the event' procedure. If an Approved Deposit taking Institution was liquidated, then:
1/ Government pays out deposit holders. (Up to $250k under the one banking licence in trouble).
2/ Government liquidates the ADI to recover its money.
3/ Government imposes an
industry levy to recover any shortfall.
So this FCS levy that might be applied to Westpac would be to pay out depositors from
another industry player that has been liquidated. As Westpac shareholders, this is outside our control unless of course it is Westpac itself that end up in liquidation. But as Westpac shareholders, we will already be 'down the dunny' by that stage: no 'levy' to worry about!
What this exercise has taught me is that if you want to understand something it is best to look at Chapter 1 of the book first, not Chapter 3!
From AR2017 p4, the Chairman's report:
"The bank levy became effective from 1st July 2017."
So I was quite wrong to say it would be applied retrospectively after a crisis. It is being applied right now in advance of any prospective crisis!
Continuing from AR2017 p6
"The Bank levy is now in place but we must continue to agitate for its removal. It is a highly inefficient and distortive tax that places an impost on a small number of Australia's largest taxpayers (ANZ, Commonwealth, NAB, Macquarie and Westpac banks). It discriminates against Australian banks relative to global peers."
Quote:
Originally Posted by
Snoopy
"The Financial Claims Scheme (ADIs) Levy Act 2008 provides for the implementation of a levy to fund the excess of certain APRA FCS costs connected to an ADI (Authorised Deposit taking Instituition) including payments by APRA to deposit holders in a failed ADI. The levy would be imposed on liabilities of eligible ADIs to their depositors and cannot be more than 0.5% of the amount of these liabilities."
The paragraph ends
"A contingent liability may exist in respect of any levy imposed under the Financial Claims Scheme."
This implies that this levy, despite being legislated for, has not been collected. But if the Federal Government wanted to collect this levy, how much would Westpac have to pay annually? If we take the amount of money in the Australian arm of the business from customer deposits as a guide, then I calculate an annual levy of up to:
0.5% x $464,254m = $2,321m per year
Yes that is right. $A2.3 billion each and every year as a levy (c.f. cash profit for FY2019 of $6.849billion) ! If ever there was a hidden sword of damocles hanging over the Westpac business model, this must be it. But will the Federal government ever implement a levy as draconian as this? And will such a levy in implemented be an annual charge or a one off.
I reiterate that this bank levy is being collected now. But it is not being levied on retail customer deposits, as I had assumed in my calculation above.
From
https://www.aph.gov.au/About_Parliam...ew201718/Banks
"The tax is expected to raise $6.2 billion over the forward estimates or around $1.5 billion annually" (A cumulative total from all five targeted banks).
That would indicate that, barring any ADI failure in the four years following 1st July 2017, the levy may cease to be applied after four years. But perhaps four years marks the end of the planning cycle, rather than the end of the tax? If this is the case, there is no signal that that the bank levy total will be capped
"There is no end date provided for the Bank Levy" (AR2018 p25)
The balance sheet for FY2019 may be found in AR2019 on p138.
Continuing to quote from the website referenced above (and adding my own AR2019 cross references):
"The tax will apply to:
1/ Corporate bonds [All fixed interest investments that Westpac have introduced to the market under their own name appear to be Tier 1 capital]: These are not applicable for the bank levy due to all Westpac (series 2,3,4,5,6 'capital notes') bonds being 'Tier 1' (see below *). However in the 'Balance Sheet' under 'Liabilities' under 'Debt Issues' there is other 'Senior Long Term Debt' listed: From AR2019 p198 Note 18, $109,340m (FY2019) and $103,159m (FY2018). The majority of Westpac 'Senior Long Term Debt' is held in foreign currencies, refer AR2019 p199 (c.f. same total figure on p198).
2/ Commercial paper [Includes Securitized Loans, Covered Bonds or 'Securitized mortgages with extra capital added' and 'Structured Notes' for example borrowings financed by energy savings from the purchase] $46,279m (FY2019), $43,171m (FY2018), from AR2019 p198 Note 18.
I think this category also includes 'Repurchase Agreements' of $10,604m (FY2019) and $9,522m (FY2018) AR2019 p197 Note 17.
3/ Certificates of deposit [Wholesale rather than personal term deposits], $38,731 (FY2019), $41,534m (FY2018) from AR2019 p195 Note 16, AND
4/ Tier 2 capital instruments. ( $12,502m (FY2019), $8,310m (FY2018) from AR2019 p200 Note 19)
(*) It will not apply to
1/ Additional Tier 1 capital and
2/ Customer deposits protected by the Financial Claims Scheme (FCS)."
"A tax of 0.06 per cent will be applied to the liabilities of banks meeting certain size criteria"
While the parent legislation allows for a levy of up to 0.5% of certain deposits, the reality is that the sum charged is 'only' 0.06%. That sounds like the banks have got away lightly. But we are talking about a sum close to $100m per year nevertheless. And the levy is due 'every year'. So to answer my own question, the levy is not a one off. But the amount collected is not as draconian as the underlying legislation allows (just over 1/10th of the maximum in fact).
SNOOPY
The cost of a deposit guarantee: Part 4.0
Quote:
Originally Posted by
Snoopy
The tax will apply to:
1/ Corporate bonds [All fixed interest investments that Westpac have introduced to the market under their own name appear to be Tier 1 capital] Not applicable for bank levy due to all Westpac (series 2,3,4,5,6 'capital notes') bonds being 'Tier 1' (see below *). However in the 'Balance Sheet' under 'Liabilities' under 'Debt Issues' there is other 'Senior Long Term Debt' listed: From AR2019 p198 Note 16, $109,340m (FY2019) and $103,159m (FY2018). The majority of Westpac 'Senior Long Term Debt' is held in foreign currencies, refer AR2019 p199.
2/ Commercial paper [Includes Securitized Loans, Covered Bonds or 'Securitized mortgages with extra capital added' and 'Structured Notes' for example borrowings financed by energy savings from the purcahse] $46,279m (FY2019), $43,171m (FY2018), from AR2019 p198 Note 18.
I think this category also includes 'Repurchase Agreements' of $10,604m (FY2019) and $9,522m (FY2018) AR2019 p197 Note 17.
3/ Certificates of deposit [Wholesale rather than personal term deposits], $38,731 (FY2019), $41,534m (FY2018) from AR2019 p195 Note 16, AND
4/ Tier 2 capital instruments. ( $12,502m (FY2019), $8,310m (FY2018) from AR2019 p200 Note 19)
(*) It will not apply to
1/ Additional Tier 1 capital and
2/ Customer deposits protected by the Financial Claims Scheme (FCS)."]
"A tax of 0.06 per cent will be applied to the liabilities of banks meeting certain size criteria"
After much consternation in deciding what liabilities to include and what to leave out, I have reached a point where I am going to have a go at calculating the 'bank levy' that Westpac paid in FY2019. The levy would have been payable on averaged account balances, not what was in each account at the end of the year. I have averaged these balances between EOFY2018 and EOFY2019 to get 'averaged balances'. This answer will almost certainly not be correct, but is the best I can do given the financial disclosures available.
It is interesting to note that in AR2017. the Chairman was vehemently opposed to the bank levy and asked shareholders to keep the pressure up on their MPs to get the tax reversed. Yet in AR2019, I haven't been able to locate even a mention of the tax. Somewhere along the line has it been subsumed into 'other expenses'? But I digress.
|
EOFY2018 |
EOFY2019 |
FY2019 Averaged |
Reference |
Corporate Bonds |
$103,159m |
$109,340m |
$106,250m |
(Senior Debt p198 AR2019) |
Commercial Paper |
$52,693m |
$56,883m |
$54,788m |
(Repurchase Agreements p197, Covered Bonds, Securitization and Structured Entities p198 AR2019) |
Certificates of Deposit |
$38,731m |
$41,534m |
$40,133m |
(Certificates of Deposit p195 AR2019} |
Tier 2 Capital Instruments |
$8,310m |
$12,502m |
$10,406m |
(Total Tier 2 Loan Capital p200 AR2019) |
Total |
|
|
$211,577m |
$211,577m x 0.06/100 = $127m
In the AR2017 'Westpac wail', the Chairman was talking about an annual tax of about $100m. So I judge my bank levy estimate for FY2019 of $127m as 'somewhere in the ball park'. I have yet to find the actual 'bank levy' figure paid over FY2019.
SNOOPY
The cost of a deposit guarantee: Part 4.1
Quote:
Originally Posted by
Southern Lad
The Westpac Group Tax Transparency Report for the year ended 30 September 2019 details A$388m of Major Bank Levy paid for FY19 compared with A$377m for FY18. The footnote states these amounts were the cash actually paid for the year, which may be different from the Bank Levy liability for each of FY19 and FY18 however the amounts are consistent y-o-y.
See
https://www.westpac.com.au/content/d...ncy_Report.pdf
Thanks for this 'Southern Lad'. I did find a reference to the bank levy in the AR2018 Chairman's address on page 7 which stated:
"The impact of the Bank Levy (which cost an equivalent amount of 8 cents per share) was also considered."
If we use the number of shares in circulation at EOFY2018 then in 'dollar terms' this impact is:
$0.08 x 3,434,796,711 = $275m
That is different to the $377m you quote, although maybe the difference can be explained by the Chairman's use of the word 'impact'. The bank levy is tax deductible. So the 'after tax' impact of a $377m bank levy, based on an Australian corporate 30% tax rate, is:
$377m x 0.7 = $264m
The corporate tax rate in Westpac New Zealand is lower at 28%. So this might explain the difference between my calculated $264m above and $275m. Nevertheless it appears my original calculated estimate of the bank levy, my post 142, from studying the annual report is some way out. This means the government is targeting more bank liabilities with this bank levy than I thought. Your figure of $377m for the bank levy over FY2018 is also confirmed (within rounding error) in the CEO's report, AR2018 p10:
"The Levy cost us $378m this year, $283m higher than 2017".
So where could I have gone wrong? Much of the 'consternation' I referred to in a previous post I list below.
1/ Note 24 of AR2019 gives more details on Westpac's Securitized Loans and Covered Bonds. These loans and associated liabilities and Covered bond and Repurchase Agreement total ($66,651m) does not tally up with that presented in the balance sheet ($56,883m). It could be that the bank levy applies to the Note 24 total, and not the balance sheet total.
2/ I have not considered that the 'Provisions' listed in the balance sheet liabilities that are further broken down in Note 27 are part of the government guarantee. Some of these provisions relate to worker entitlements, in particular leave. Since workers are almost always near the head of the queue to be paid out in the event of a liquidation, I did not consider a government guarantee was required on those payments. Other provisions related to restructuring and impairments on credit commitments. I considered these provisions transient and not indicative of the longer term capital position of the bank. So I didn't count any of this as part of the bank liabilities to be guaranteed.
3/ I didn't consider that any of the 'Derivative Financial Liabilities' were positions that would need to be bailed out. I considered that most of these were taken out to provide certainty of cashflows and would end up being neutral by the time any underlying loan was repaid.
I may have been wrong on those 'executive decisions' I made when considering Westpac's liability position. And I don't think that even if I had included all those extra liabilities it would have been enough to make up the difference. But there you are :-(.
SNOOPY
Unpicking the WBC Internal Wealth Managment Business BTFG & Listed BTIM (Part 1)
Quote:
Originally Posted by
Snoopy
Westpac run a wealth management business where they manage fund based share portfolios on behalf of clients. Despite only holding a minority stake in what used to be a fully owned wealth management subsidiary, BT, BT is still classed as a 'related corporate body' to Westpac (apparently!). Thus if BT make changes to their clients portfolios, then Westpac must report this to the NZX. All these funds will be in trust for clients.
I am attempting to unpick the 'Wealth Management' side of WBC from what is left.
From:
https://www.pendalgroup.com/about/corporate-approach/
We learn that what was "BT Financial Group Australia" , a part of Westpac, is an unrelated business to "BT Investment Management Limited", the listed entity.
I need to 'unpick the wealth business' because:
1/ Westpac have reduced their links to the separately listed wealth management arm "BT Investment Management Limited" (BTIM, now renamed 'Pendal Group') to around 10%, with the expectation that this residual holding will be sold.
2/ Westpac have also disestablished their internal wealth management division "BT Financial Group Australia".
This means historical comparisons are going to be difficult from here on in. Westpac have redone their comparatives for FY2018 and FY2017 to account for this latter change at least. But I want to do the full exercise for FY2016 and FY2015 as well.
So let's get on with this unpicking exercise...
-------------
The following information may be gleaned from the respective annual reports under the note for "Investments in Subsidiaries and Associates."
--------
1/ The separately listed wealth business was first partially floated on 10th December 2007. On that date 40% of "BT Investment Management Ltd" (BTIM) (BTT.AX) was floated to the public. A net gain of $141m, pre tax, was generated on this sale (AR2008 p82/p141).
2/ On 23rd June 2015 Westpac reduced their 60.8% holding in BTIM to 31.0% with an institutional and retail offer. Westpac made a gain in two ways doing this. The gain included a 'realised gain' of the 28% of BTIM sold ($492m) and an 'unrealised gain' of the 31% interest retained ($544m). This resulted in a total pre-tax gain of: $492m + $544m = $1,036m (AR2015 p77/p135/p245).
3/ On 26th May 2017 Westpac sold a further 19% of BTIM (carrying value $471m) reducing their holding to 10% (residual carrying value $242m). The result was a net gain (net of transaction costs before tax) of $279m (AR2017 p139/p227).
|
Market Value |
Book value |
Profit on Transacction |
|
Shares Sold |
$630m |
- $471m |
=$159m |
(Gross proceeds on sale of 19% stake) |
Shares Retained |
add $375m |
-$242m |
=$133m |
(Mark to market revaluation of residual stake) |
Shares Total |
$1,005m |
-$713m |
|
|
|
less |
|
($13m) |
(Former associate profit transferred to profit or loss) |
|
equals |
|
$279m |
(Total Gain as a Result of BTIM sales) |
In the the end of year accounts for FY2017, the remaining 10% of BTIM owned was reclassified from an 'associate' to an 'available for sale security' at a market value of $375m (This is the value of the 'residual stake' at the time of the sale of the other 19%).
4/ In FY2018 there was a $104m write down in the residual value of 'Pendal Group' (p160 AR2018). (Name Change Note: A decade on from the float, following approval from its own shareholders, BT Investment Management Limited (BTIM) changed its own company name to "Pendal Group Limited" (PDL.AX) on 27 April 2018).
The accounting value at EOFY2018 of the 10% residual stake on the books was therefore:
$375m - $104m = $271m
This writedown must have been because the price of Pendal shares showed a 'significant or prolonged decline in fair value below cost'. Before the implementation of AASB 9 in FY2019, these changes in value were only made in exceptional circumstances. Nevertheless the fall in Pendal share price from $11.5 (EOFY2017) to $8.79 (EOFY2018), while substantial, represents a loss in capital value of 'only' $69.1m for Westpac's stake. I don't know why the recorded loss blew out to $104m.
5/ Over FY2019, WBC continues to own their 10% residual shareholding in Pendal. However the residual shareholding remains on the 'may be sold' list. Consequently Westpac has elected to remove any contribution from Pendal from what they term their 'cash earnings' (p147 WBC Annual Result Presentation 2019). 'Cash Earnings' is a construct by Westpac which they consider best reflects the performance of their underlying business. 'Cash Earnings' in this sense is a bit of a misnomer because the now excluded 'Pendal dividend received' is indeed cash!
-------
Now we return to figures associated with the FY2018 WBC balance date of 30th September 2018 (after the Pendal name change). At that time the Westpac internally owned and managed fund business arm was still called "BT Financial Group Australia"! But this is not really remarkable, because "BT Investment Management Limited"(BTIM) (now Pendal) and "BT Financial Group Australia" were truly distinct and separate entities.
By EOFY2019, what was the Westpac division "BT Financial Group Australia" has been split up and the business sub units reallocated within other Westpac divisions. The effect of this can be demonstrated by looking at two different reporting perspectives the reallocation of FY2018 earnings between Westpac divisions in accordance with the table below:
Westpac Business Unit Cash Earnings |
FY2018 (from AR2019 p157) |
FY2018 (from AR2018 p155) |
Difference |
Consumer Bank |
$3,423m |
$3,140m |
+$283m (+9.0%) |
Business Bank |
$2,756m |
$2,159m |
+$597m (+28%) |
BT Financial Group |
$0m |
$645m |
-$645m (-100%) |
Westpac Institutional Bank |
$1,093m |
$1,086m |
+$7m (+0.65%) |
Group Business |
($141m) |
$101m |
-$242m (NM) |
Total Australian Cash Earnings |
$8,065m |
$8,065m |
$0m |
As you can see from AR2019 retrospective reallocation, what was the remaining BT business unit, the 'BT Financial Group' has been 'written out of history' a year down the track.
As was reported in the news at the time:
https://www.smh.com.au/business/bank...19-p515cr.html
"Westpac will continue to provide life insurance and a wealth management platform, Panorama, under the BT banner and will refer clients seeking financial advice to a panel of firms, as it would with people needing accounting or legal advice."
So Westpac still owns the "BT brand" and will still use the BT label on certain products.
"Chief executive Brian Hartzer on Tuesday said selling investment advice had become unprofitable, citing rising costs and the impact of the Future of Financial Advice (FOFA) laws, which banned advisers from receiving commissions on investment products."
This is an extraordinary thing to say when just one year earlier Westpac's internal wealth management division made cash profits of $645m (see above table). However, Hartzer must have only talking about giving 'personal advice'. Only the small bit of the internal wealth business ('personal advice') that hasn't been reallocated (see above table) has been on sold to "Viridian Advisory". So who are 'Viridian Advisory'?
-------
"Viridian Advisory will take over part of the bank's advice arm while the rest of Westpac's BT Financial Group businesses - private wealth, superannuation, life insurance and investments - will be rolled into its consumer and business banking divisions."
"The change would result in about 900 job losses, Mr Hartzer said, with Viridian offering employment to about 175 BT salaried positions (including 90 financial advice staff , and other management and support staff)."
"Viridian's chief executive and co-founder, Glenn Calder, said the deal with Westpac would set the firm up for "strong growth", 2as the industry focused on fees for service and the provision of quality advice."
--------
Through all of this I have not found any mention of how much Viridian paid to WBC to take over the personal advice business. Considering it was loss making, maybe only a token amount? In the annual results presentation for FY2019 on slide 17, a sale of $10m of 'financial planning assets' was reported. This exit from the "financial planning business" is expected to lead to a $50m loss in 'non-interest income' (slide 28 ARP2019). Nevertheless,
"quitting financial advice is predicted to remove about $280 million in annual costs"
for Westpac.
Some more background on Viridian may be found here:
From:
https://www.professionalplanner.com....-for-9-months/
-------
Viridian is an unlisted company which currently (prior to the Westpac advisor buyout) has six offices across four states and a “ten or twelve-year history”, according to Calder. Most of the employees are former Westpac staff who banded together to purchase the business from the bank.
“The nucleus of our company comes from Westpac,” he said. “All of our staff and some of our clients are shareholders and you need to be a connected party to have an ownership stake in Viridian.”
--------
SNOOPY
The cost of a deposit guarantee: Part 4.2
Quote:
Originally Posted by
Snoopy
After much consternation in deciding what liabilities to include and what to leave out, I have reached a point where I am going to have a go at calculating the 'bank levy' that Westpac paid in FY2019. The levy would have been payable on averaged account balances, not what was in each account at the end of the year. I have averaged these balances between EOFY2018 and EOFY2019 to get 'averaged balances'. This answer will almost certainly not be correct, but is the best I can do given the financial disclosures available.
It is interesting to note that while in AR2017. the Chairman was vehemently opposed to the bank levy and asked shareholders to keep the pressure up on their MPs to get the tax reversed. Yet in AR2019, I haven't been able to locate even a mention of the tax. Somewhere along the line has it been subsumed into 'other expenses'? But I digress.
|
EOFY2018 |
EOFY2019 |
FY2019 Averaged |
Reference |
Corporate Bonds |
$103,159m |
$109,340m |
$106,250m |
(Senior Debt p198 AR2019) |
Commercial Paper |
$52,693m |
$56,883m |
$54,788m |
(Repurchase Agreements p197, Covered Bonds, Securitization and Structured Entities p198 AR2019) |
Certificates of Deposit |
$38,731m |
$41,534m |
$40,133m |
(Certificates of Deposit p195 AR2019} |
Tier 2 Capital Instruments |
$8,310m |
$12,502m |
$10,406m |
(Total Tier 2 Loan Capital p200 AR2019) |
Total |
|
|
$211,577m |
$211,577m x 0.06/100 = $127m
In the AR2017 'Westpac wail', the Chairman was talking about an annual tax of about $100m. So I judge my bank levy estimate for FY2019 of $127m as 'somewhere in the ball park'. I have yet to find the actual 'bank levy' figure paid over FY2019.
Quote:
Originally Posted by
Snoopy
So where could I have gone wrong? Much of the 'consternation' I referred to in a previous post I list below.
1/ Note 24 of AR2019 gives more details on Westpac's Securitized Loans and Covered Bonds. These loans and associated liabilities and Covered bond and Repurchase Agreement total ($66,651m) does not tally up with that presented in the balance sheet ($56,883m). It could be that the bank levy applies to the Note 24 total, and not the balance sheet total.
2/ I have not considered that the 'Provisions' listed in the balance sheet liabilities that are further broken down in Note 27 are part of the government guarantee. Some of these provisions relate to worker entitlements, in particular leave. Since workers are almost always near the head of the queue to be paid out in the event of a liquidation, I did not consider a government guarantee was required on those payments. Other provisions related to restructuring and impairments on credit commitments. I considered these provisions transient and not indicative of the longer term capital position of the bank. So I didn't count any of this as part of the bank liabilities to be guaranteed.
3/ I didn't consider that any of the 'Derivative Financial Liabilities' were positions that would need to be bailed out. I considered that most of these were taken out to provide certainty of cashflows and would end up being neutral by the time any underlying loan was repaid.
I may have been wrong on those 'executive decisions' I made when considering Westpac's liability position. And I don't think that even if I had included all those extra liabilities it would have been enough to make up the difference. But there you are :-(.
I have plucked up the courage to make my changes and see if I can improve my estimate of how the bank levy was calculated.
The problem is that if we use the known amount of the Bank Levy paid over 2019 of $388m, then at the declared rate of 0.06%, we must be looking at an averaged levied bank liability balance of:
$388m / 0.0006 = $646,667m
That is a huge step up from the $211,577m total listed in the table above. So let's do the recalculation.
|
EOFY2018 |
EOFY2019 |
FY2019 Averaged |
Reference |
Corporate Bonds |
$103,159m |
$109,340m |
$106,250m |
(Senior Debt p198 AR2019) |
Commercial Paper |
$63,211m |
$66,651m |
$64,931m |
(Repurchase Agreements Covered Bonds, and Securitization p248 AR2019) |
Certificates of Deposit |
$38,731m |
$41,534m |
$40,133m |
(Certificates of Deposit p195 AR2019} |
Provisions |
$2,026m |
$3,169m |
$2,598m |
(Provisions p253 AR2019} |
Derivative Financial Instruments |
$24,407m |
$29,096m |
$26,752m |
(Total Net Derivatives p206 AR2019} |
Tier 2 Capital Instruments |
$8,310m |
$12,502m |
$10,406m |
(Total Tier 2 Loan Capital p200 AR2019) |
Total |
|
|
$250,530m |
Even with adjustments this total is still $400,000 shy of the total I was expecting. This means something is still badly wrong in my 'reimbursable liabilities base'. Looking through the liabilities in the balance sheet again, the only item that can make up that kind of difference is 'customer deposits'. If we look in note 16 AR2019 page 196 we can see that total Australian deposits (less the certificates of deposit that I have already counted) add up to: $468,254m - $30,367m = $437,887m. I have excluded the 'New Zealand' and 'Other Overseas' deposits because it is doubtful an Australian Bank Levy would cover overseas deposits for non-Australians. Take away the derivative guarantees again (I am still dubious about those) and we are getting close to that implied liability base number. The Australian bank term deposits must be covered by the bank levy after all! This is the only reasonable explanation I can think of to explain why the bank levy charge paid by Westpac is so high.
SNOOPY
The cost of a deposit guarantee: Part 4.3
Quote:
Originally Posted by
Snoopy
Even with adjustments this total is still $400,000 shy of the total I was expecting. This means something is still badly wrong in my 'reimbursable liabilities base'. Looking through the liabilities in the balance sheet again, the only item that can make up that kind of difference is 'customer deposits'. If we look in note 16 AR2019 page 196 we can see that total Australian deposits (less the certificates of deposit that I have already counted) add up to $437,877. I have excluded the overseas deposits because it is doubtful an Australian Bank Levy would cover overseas deposits for non-Australians. Take away the derivative guarantees again ( I am still dubious about those) and we are getting close to that implied liability base number. The Australian bank term deposits must be covered by the bank levy after all! This is the only reasonable explanation I can think of to explain why the bank levy charge paid by Westpac is so high.
I have gone back to my original assessment of 'guaranteed liabilities' and added back in Australian customer bank account balances. I wasn't happy with the changes in iteration 4.2 which were made to try and 'get the numbers to fit'. I am estimating my 'average' from knowing the start of year and end of year end point values (which is not an entirely accurate method, but is acceptable given the inputs we have available).
|
EOFY2018 |
EOFY2019 |
FY2019 Averaged |
Reference |
Corporate Bonds |
$103,159m |
$109,340m |
$106,250m |
(Senior Debt p198 AR2019) |
Commercial Paper |
$52,693m |
$56,883m |
$54,788m |
(Repurchase Agreements p197, Covered Bonds, Securitization and Structured Entities p198 AR2019) |
Certificates of Deposit |
$38,731m |
$41,534m |
$40,133m |
(Certificates of Deposit p195 AR2019} |
Customer Deposits (Australia) |
|
|
$437,887m |
(Non-interest bearing, interest bearing at call, interest bearing term p196 AR2019} |
Tier 2 Capital Instruments |
$8,310m |
$12,502m |
$10,406m |
(Total Tier 2 Loan Capital p200 AR2019) |
Total |
|
|
$649,464m |
Bank Levy Estimate Calculation for FY2019
0.0006 x $649,464m = $390m
This is very close to the declared bank levy figure of $388m. I don't expect my calculation to match the actual figure exactly. That is because, customer deposits aside, I am calculating an average over the year by just knowing the beginning and end points. The other data that I need in between to calculate a true annual average data is missing. Yet I am very encouraged that my calculated figure is so close. Why is this a big deal? Because now I can use the same method to calculate what the bank levy would have been if it had been in place over the whole of FY2017, FY2016 and FY2015. And I need to do that so that I can decouple operational performance of the bank from any extra taxes imposed.
SNOOPY
The cost of a deposit guarantee: Part 5.0
Quote:
Originally Posted by
Southern Lad
The Westpac Group Tax Transparency
Report for the year ended 30 September 2019 details A$388m of Major Bank Levy paid for FY19 compared with A$377m for FY18. The footnote states these amounts were the cash actually paid for the year, which may be different from the Bank Levy liability for each of FY19 and FY18 however the amounts are consistent y-o-y.
See
https://www.westpac.com.au/content/d...ncy_Report.pdf
Quote:
Originally Posted by
Snoopy
Now I can use the same method to calculate what the bank levy would have been if it had been in place over the whole of FY2017, FY2016 and FY2015. And I need to do that so that I can decouple operational performance of the bank from any extra taxes imposed.
Bank Levy Estimate Calculation for FY2017
|
EOFY2016 |
EOFY2017 |
FY2017 Averaged |
Reference |
Corporate Bonds |
$106,626m |
$98,823m |
$102,725m |
(Senior Debt p165 AR2017) |
Commercial Paper |
$47,760m |
$46,511m |
$47,136m |
(Repurchase Agreements p164, Covered Bonds, Securitization and Structured Entities p165 AR2017) |
Certificates of Deposit |
$46,463m |
$46,921m |
$46,692m |
(Certificates of Deposit p163 AR2017} |
Customer Deposits (Australia) |
|
|
$415,591m |
(Non-interest bearing, interest bearing at call, interest bearing term p164 AR2017} |
Tier 2 Capital Instruments |
$8,947m |
$9,238m |
$9,093m |
(Total Tier 2 Loan Capital p166 AR2017) |
Total |
|
|
$621,237m |
Bank Levy Estimate Calculation for FY2017
0.0006 x $621,237m = $373m
From AR2018 p10 "The levy cost us $378m this year, $283m higher than 2017." By simple subtraction this means that the bank levy paid in FY2017 was $95m (confirmed in AR2017 p17). But the levy was only payable for three months of that year. So we have to make an incremental bank levy adjustment of: $373m - $95m = $278m, to bring FY2017 into line with subsequent years in which the bank levy is payable over the whole year.
Note
There was no bank levy payable over FY2016 and earlier. However, if we imagine there was, and adjust for it accordingly in a retrospective way, this will provide a better 'measuring yardstick' to compare the business performance with going forwards.
Bank Levy Estimate Calculation for FY2016
|
EOFY2015 |
EOFY2016 |
FY2016 Averaged |
Reference |
Corporate Bonds |
$87,645m |
$106,626m |
$97,156m |
(Senior Debt p160 AR2016) |
Commercial Paper |
$55,593m |
$47,760m |
$51,676m |
(Repurchase Agreements p159, Covered Bonds, Securitization and Structured Entities p160 AR2016) |
Certificates of Deposit |
$48,184m |
$46,463m |
$46,692m |
(Certificates of Deposit p158 AR2016} |
Customer Deposits (Australia) |
|
|
$380,682m |
(Non-interest bearing, interest bearing at call, interest bearing term p159 AR2016} |
Tier 2 Capital Instruments |
$7,912m |
$8,947m |
$8,430m |
(Total Tier 2 Loan Capital p161 AR2016) |
Total |
|
|
$585,248m |
Bank Levy Estimate Calculation for FY2016
0.0006 x $585,248m = $351m
Bank Levy Estimate Calculation for FY2015
|
EOFY2014 |
EOFY2015 |
FY2015 Averaged |
Reference |
Corporate Bonds |
$82,377m |
$87,645m |
$85,011m |
(Senior Debt p158 AR2015) |
Commercial Paper |
$55,303m |
$55,933m |
$55,628m |
(Repurchase Agreements p157, Covered Bonds, Securitization and Structured Entities p158 AR2015) |
Certificates of Deposit |
$51,577m |
$48,184m |
$49,881m |
(Certificates of Deposit p156 AR2015} |
Customer Deposits (Australia) |
|
|
$354,199m |
(Non-interest bearing, interest bearing at call, interest bearing term p157 AR2015} |
Tier 2 Capital Instruments |
$6,376m |
$7,912m |
$7,104m |
(Total Tier 2 Loan Capital p159 AR2015) |
Total |
|
|
$551,863m |
Bank Levy Estimate Calculation for FY2015
0.0006 x $551,863m = $331m
Note that the bank levy is a tax deductible expense for Westpac.
SNOOPY
Buffett Test 1/ FY2019: Top Three Position in Chosen Operating Markets
Quote:
Originally Posted by
Snoopy
I aim to assess whether the 'Westpac Group' is a suitable candidate to which to apply the (Mary) 'Buffett' growth model .
WBC, incorporated in Australia, but also listed on the NZX describes their operation of their business in the FY2015 Annual Report as follows:
"to be one of the world's great service companies helping our customers, communities and people to prosper and grow"
It would be an oversimlification to think of Westpac just as a traditional bank. They have a strong wealth and insurance business through associated company BT Group, in which they sold down their controlling stake in FY2015. The business is based around strong Australian and New Zealand geographic foundations. The New Zealand business is a self contained unit.
The business objectives are to support:
1/ Australian and New Zealand consumers.
2/ Australian and New Zealand businesses, both large and small
2/ Regional Trade and Capital Flows for business customers via the WIB ("Westpac Institutional Banking Division".)
3/ A 'digital ready infrastructure' for the future.
Major Competitors in this sector are listed in order by $A revenue (interest income).
1/ Commonwealth Bank of Australia: $33,817m
2/ Westpac Bank: $31,822m
3/ ANZ Bank: $29.951m
4/ National Australia Bank $27,629m
Conclusion: As number two in the market, WBC passes the first Buffett Point test.
An overseeing body shake up of the Australian big four banks has seen Westpac put up as 'Available for Sale' their last 10% link with their listed wealth management associate - Pendal Group - and realign some residual wealth management in house functions under the in house broad based 'Persomal' and 'Business' customer units.
'Personal' incorporates Bank Accounts, Home Loans, Credit Cards, Personal Loans, and International & Travel. They offer consumers share trading, Insurance (including mortgage insurance) and superannuation services (investing in other peoples managed funds and listed shares.)
'Business' for small to medium enterprises adds invoicing, merchant services, business loans, business insurances and forex services.
'A third business unit Westpac Institutional Bank' (WIB) looks after corporate and government banking requirements.
Westpac continues to claim they aspire :
"To be one of the world’s great service companies, helping our customers, communities and people to prosper and grow.”
Westpac use their 'Net Promoter Score' (NPS) to claim they are number 2 (of the big four banks) for consumers and number 1 for business. The Australian NPS scores are negative. (-7.3 for consumers and -4.5 for business: refer slide 38 in FY2019 Result Presentation). These NPS scores can vary between -100 and +100, withj a level above +30 considered to be 'good'. So even though Westpac does well in reference to other banks, these scores show most Westpac customers would not recommend Westpac's services to others. That doesn't tie in with the vision of being a 'great service company'. The corporate business fares much better with an NPS score of +51. Perhaps that shows where the real service strength of Westpac lies?
Major Competitors in the Australasian banking sector are listed in order by $A revenue for FY2019 (interest income + non-interest income).
1/ Commonwealth Bank of Australia: $34,588m +$4,994m + $1,073m + $150m = $40,805m
2/ Westpac Bank: $33,222m + $1,655m + $1,029m + $929m + $129m = $36,964m
3/ ANZ Bank: $31,077m + $4,058m + $126m + $262m = $35,523m
4/ National Australia Bank: $29,203m + $4,373m = $33,576m
Conclusion: As number two in the market by turnover, WBC passes the first Buffett Point test.
SNOOPY
Impaired Asset Trend (FY2019 Perspective)
WBC |
|
Annual Net Impaired Asset Expense (A) |
Total Impaired Loan and Credit Commitment Provision (B) |
(A)/(B) |
Total Loans (impairment (B) included) (C) |
(B)/(C) |
EBT (before impaired asset exposure) (D) |
(A)/(D) |
FY2008 |
$931m |
$2,174m |
43% |
$315,719m |
0.7% |
$6,150m |
15.1% |
FY2009 |
$3,238m |
$4,734m |
68% |
$468,193m |
1.0% |
$9,334m |
34.7% |
FY2010 |
$1,456m |
$5,061m |
26% |
$482,716m |
0.9% |
$9,494m |
15.3% |
FY2011 |
$993m |
$4,414m |
22% |
$501,023m |
0.9% |
$9,507m |
10.4% |
FY2012 |
$1,212m |
$4,241m |
29% |
$518,686m |
0.8% |
$10,026m |
12.0% |
FY2013 |
$847m |
$3,949m |
21% |
$540,113m |
0.7% |
$10,619m |
8.0% |
FY2014 |
$650m |
$3,481m |
19% |
$583,824m |
0.6% |
$11,390m |
5.7% |
FY2015 |
$753m |
$3,332m |
23% |
$626,648m |
0.5% |
$12,169m |
6.2% |
FY2016 |
$1,124m |
$3,602m |
31% |
$665,528m |
0.5% |
$11,768m |
9.6% |
FY2017 |
$853m |
$3,119m |
27% |
$688,038m |
0.5% |
$12,368m |
6.9% |
FY2018 |
$710m |
$3,053m |
23% |
$712,733m |
0.4% |
$12,441m |
5.7% |
FY2019 |
$794m |
$3,913m (*1) |
20% |
$718,683m |
0.5% |
$10.543m |
7.5% |
(*1) Includes a $980m increment from the adoption of accounting standard AASB9 (on Financial Instruments, including impairment). AASB9 includes a new 3 level impaired debt assessment classification as part of the newly adopted ECL (Expected Credit Loss) model.
SNOOPY
An unorchestrated 'litigation lot' of liabilities: Part 3
Quote:
Originally Posted by
Snoopy
'The bank that may have facilitated pedophiles'
doesn't sound like a great marketing campaign line.
AUSTRAC (The Australian Transaction Reports and Analysis Centre) is investigating and
"Any enforcement action against Westpac may include civil penalty proceedings and result in the payment of a significant financial penalty which Westpac is currently unable to reliable estimate." (AR2019 p255)
Quote:
Originally Posted by
Snoopy
Bankers know a lot about their customers and their spending habits. Some say they can identify if your bankcard and security code is stolen by flagging as few as two to three transactions. Banks also have anti-money laundering responsibilities and are required to look out for proceeds of crime. I guess some banks take their responsibilities more seriously than other banks. It appears only Westpac facilitate the funding of Paedophile rings on a large scale. Other banks put Children above profit.
The 24th November 2019 Westpac press release indicates that Westpac still expect to be fined, for not having the necessary checks on some accounts. However they have rolled out the following $54m dollars worth of 'good corporate citizen' measures:
-----
1/ Funding for the International Justice Mission (IJM): Westpac will match IJM's current level of funding, investing $18 million over three years to tackle Online Sexual Exploitation of Children (OSEC) in the Philippines. This will enable IJM to expand on-the-ground initiatives in Southeast Asia to help end child exploitation.
2/ Funding for SaferKids: Westpac will match the Australian Government's current level of funding for its SaferKids partnership with Save the Children, UNICEF and The Asia Foundation, investing $6 million over six years to raise awareness of Online Sexual Exploitation of Children (OSEC) and support programs to protect children in the Philippines.
3/ Prevention: Westpac will seek the guidance of industry experts, through the convening of an expert advisory roundtable, to develop a program of actions to support the prevention of online child exploitation. Westpac will provide funding of up to $10 million per year for three years to implement these recommendations
-----
In house,
1/ Westpac have closed their "Westpac Australasian Cash Management Product" and "LitePay international funds transfer system". These were two platforms where funds could be transferred with little accountability.
2/ Westpac intend to hire an additional 200 people to add to their financial crime resourcing team. This team has already been boosted by 325, to 750 people over the last three years.
3/ Westpac will invest $25 million to improve cross-border and cross-industry data sharing and analysis to better support regulators and authorities to fight financial crime
Those financial commitments add up to $79m, excluding Westpac's own incremental internal costs.
The 25th November 2019 Westpac press release contains more details on Westpac's costs for the full support of the anti-pedophile program:
"Westpac has made a number of commitments including to improve its financial crime program, support industry initiatives to enhance financial crime monitoring and provide additional support and resources to organisations that are working to eradicate child exploitation. We estimate these commitments will increase expenses by up to $80 million (pre tax) in FY20 when the majority will be incurred or provided for. These expenses will be included in cash earnings and treated as notable items."
The 'notable items' comment is made in relation to the whole thing being a 'non-operational matter." I would not include it as part of 'normalised earnings'.
I am not sure what kind of fine Westpac may expect as a result of their prior inactions, to be offset by their subsequent make good efforts at least in a judge's eye. I don't think they will get away with a wet bus ticket though. But given that Westpac was a conduit for crime rather than doing the crime themselves, I wonder if it will be somewhat in the order of $20m? That would see Westpac face a total cost of $80m + $20m = $100m for the whole matter. $100m sounds like a good 'headline punishment' to face. Anyone know how this figure compares with existing court precedents?
These 'good corporate citizen' measure responses will form part of the FY2020 'one off expense' picture.
SNOOPY
The benefit of NZ Imputation Credits
Quote:
Originally Posted by
Snoopy
Westpac dividends have had associated NZ imputation credits (to a limited degree) for several years now. You can claim these imputation credits as tax paid in New Zealand on your New Zealand income. However these imputation credits are not paid to 28% and are insufficient to extinguish your NZ tax obligations on the whole Westpac dividend.
Some dividend hounds spurn overseas shares because the dividends they pay do not come with NZ imputation credits attached. However Westpac is an exception as it does offer NZ imputation credits, courtesy of the highly profitable fully owned subsidiary Westpac New Zealand. We cannot buy shares in Westpac New Zealand though, only the Australian parent company. The Westpac dividend has been remarkably steady in $A terms, albeit it has taken a hit in December 2019, a drop which looks likely to stick over the next few years. NZ investors have some exchange rate volatility to deal with when banking their dividends. Nevertheless in recent years the volatility of the exchange rate between NZ and Australia has been markedly less than between NZ and other major trading currencies. Why the dividend reduction? Westpac has more shares on issue now after the December share issue. And Westpac needs to retain more earnings to remain 'unquestionably strong' in the eye of the banking regulators. So although the dividend has been reduced, the trade off is that shareholders' investment in WBC should be 'safer' going forwards.
The table below outlines the dividends paid over the past five years and the benefits accruing to NZ shareholders from those imputation credits.
Payment Date |
dps ($A) |
AUD/NZD Exchange Rate |
dps ($NZ) |
Imputed Credit ($NZ) |
Gross Dividend ($NZ) |
02-07-2014 |
0.90 |
0.9272 |
0.9707 |
0.0600 |
1.0307 |
19-12-2014 |
0.92 |
0.9474 |
0.9711 |
0.0600 |
1.0311 |
02-12-2015 |
0.93 |
0.8806 |
1.0561 |
0.0600 |
1.1161 |
21-12-2015 |
0.94 |
0.9412 |
0.9987 |
0.0600 |
1.0587 |
04-07-2016 |
0.94 |
0.9601 |
0.9791 |
0.0700 |
1.0491 |
21-12-2016 |
0.94 |
0.9529 |
0.9865 |
0.0700 |
1.0565 |
04-07-2017 |
0.94 |
0.9577 |
0.9815 |
0.0700 |
1.0515 |
22-12-2017 |
0.94 |
0.9105 |
1.0325 |
0.0700 |
1.1025 |
04-07-2018 |
0.94 |
0.9151 |
1.0272 |
0.0700 |
1.0972 |
20-12-2018 |
0.94 |
0.9526 |
0.9868 |
0.0700 |
1.0568 |
24-06-2019 |
0.94 |
0.9503 |
0.9892 |
0.0700 |
1.0592 |
20-12-2019 |
0.80 |
0.9595 |
0.8338 |
0.0700 |
0.9038 |
Total |
|
|
11.81 |
0.80 |
12.61 |
80c extra over five years is not a game changer. But it is not to be sneezed at either. I observe that although the last dividend was reduced, the imputation credit attached to that dividend was not reduced. So going forwards, the Westpac imputation credit is likely to be more important in relative terms than in past years.
SNOOPY
Pendal/BTIM dividends for Westpac: FY2015 to FY2019
Quote:
Originally Posted by
Snoopy
I am attempting to unpick the 'Wealth Management' side of WBC from what is left.
--------
1/ The separately listed wealth business was first partially floated on 10th December 2007. On that date 40% of what used to be called "BT Investment Management Ltd" (BTIM) (BTT.AX) was floated to the public. A net gain of $141m, pre tax, was generated on this sale (AR2008 p82/p141).
2/ On 23rd June 2015 Westpac reduced their 60.8% holding in BTIM to 31.0% with and institutional and retail offer. This resulted in a pre-tax gain of $1,036m (AR2015 p77/p135/p245). This gain included the realised gain of the 28% of BTIM sold ($492m) and the unrealised gain of the 31% interest retained ($544m).
3/ On 26th May 2017 Westpac sold a further 19% of BTIM (carrying value $471m) reducing their holding to 10% (residual carrying value $242m). The result was a net gain (net of transaction costs before tax) of $279m (AR2017 p139/p227).
$630m - $471m = |
$159m |
(Gross proceeds on sale of 19% stake) |
add $375m - $242m = |
$133m |
(Mark to market revaluation of residual stake) |
less |
($13m) |
(Former associate profit transferred to profit or loss) |
equals |
$279m |
(Total Gain as a Result of BTIM sales) |
In the the end of year accounts for FY2017, the remaining 10% of BTIM owned was reclassified from an 'associate' to an 'available for sale security' at a market value of $375m.
4/ In FY2018 there was a $104m write down in the residual value of 'Pendal Group' (p160 AR2018). (Name Change Note: A decade on from the float, following approval from its own shareholders, BT Investment Management Limited (BTIM) changed its company name to "Pendal Group Limited" (PDL.AX) on 27 April 2018).
The accounting value at EOFY2018 of the 10% residual stake on the books was therefore:
$375m - $104m = $271m
5/ In FY2019, WBC continues to own their 10% residual shareholding in Pendal. However it remains on the 'may be sold' list and Westpac has elected to remove any contribution from Pendal from their cash earninmgs (p147 WBC Annual Result Presentation).
-------
Dividends Paid to Westpac by Pendal Group (PDL.ASX)
Financial Year |
Ex-dividend date |
Dividend per Share |
Dividend Payout |
Westpac %ge Shareholding |
Payout to Westpac |
Sum over Financial Year Payout to Westpac |
---------- |
---------- |
---------- |
---------- |
---------- |
---------- |
---------- |
FY2015 |
03-12-2014 |
19cps (35% Franked) |
$52.891m |
60.76% |
$32.137m |
|
13-05-2015 |
17cps (40% Franked) |
$47.159m |
60.76% |
$28.634m |
$60.771m |
---------- |
---------- |
---------- |
---------- |
---------- |
---------- |
---------- |
FY2016 |
02-12-2015 |
20cps (40% Franked) |
$57.206m |
31.04% |
$17.757m |
|
26-05-2016 |
18cps (40% Franked) |
$52.521m |
31.04% |
$16.303m |
$34.060m |
---------- |
---------- |
---------- |
---------- |
---------- |
---------- |
---------- |
FY2017 |
08-12-2016 |
24cps (35% Franked) |
$71.365m |
29.54% |
$21.081m |
|
25-05-2017 |
19cps (30% Franked) |
$54.653m |
29.54% |
$16.144m |
$37.225m |
---------- |
---------- |
---------- |
---------- |
---------- |
---------- |
---------- |
FY2018 |
07-12-2017 |
26cps (25% Franked) |
$78.191m |
8.99% |
$7.029m |
|
25-05-2018 |
22cps (15% Franked) |
$65.565m |
8.99% |
$5.894m |
$12.523m |
---------- |
---------- |
---------- |
---------- |
---------- |
---------- |
---------- |
FY2019 |
06-12-2018 |
30cps (15% Franked) |
$89.873m |
10.40% |
$9.347m |
|
23-05-2019 |
20cps (10% Franked) |
$59.897m |
10.40% |
$6.229m |
$15.576m |
---------- |
---------- |
---------- |
---------- |
---------- |
---------- |
---------- |
FY2020 |
05-12-2019 |
25cps (10% Franked) |
$76.078m |
9.55% |
$7.265m |
|
Notes
1/ The 23rd June 2015 'sell down' of Pendal shares by Westpac was after the 17cps ex-dividend date of 13th May 2015. This means that the whole 172,100,801 Pendal shares previously owned by Westpac qualified for that dividend.
2/ The 26th May 2017 'sell down' of Pendal shares was after the 25th May 2017 19cps ex-dividend date. This means that the whole 90,814,493 Pendal shares previously held by Westpac qualified for that dividend.
SNOOPY
Pendal/BTIM capital charge for Westpac: FY2015 to FY2019
Quote:
Originally Posted by
Snoopy
I am attempting to unpick the 'Wealth Management' side of WBC from what is left.
--------
1/ The separately listed wealth business was first partially floated on 10th December 2007. On that date 40% of what used to be called "BT Investment Management Ltd" (BTIM) (BTT.AX) was floated to the public. A net gain of $141m, pre tax, was generated on this sale (AR2008 p82/p141).
2/ On 23rd June 2015 Westpac reduced their 60.8% holding in BTIM to 31.0% with and institutional and retail offer. This resulted in a pre-tax gain of $1,036m (AR2015 p77/p135/p245). This gain included the realised gain of the 28% of BTIM sold ($492m) and the unrealised gain of the 31% interest retained ($544m).
3/ On 26th May 2017 Westpac sold a further 19% of BTIM (carrying value $471m) reducing their holding to 10% (residual carrying value $242m). The result was a net gain (net of transaction costs before tax) of $279m (AR2017 p139/p227).
$630m - $471m = |
$159m |
(Gross proceeds on sale of 19% stake) |
add $375m - $242m = |
$133m |
(Mark to market revaluation of residual stake) |
less |
($13m) |
(Former associate profit transferred to profit or loss) |
equals |
$279m |
(Total Gain as a Result of BTIM sales) |
In the the end of year accounts for FY2017, the remaining 10% of BTIM owned was reclassified from an 'associate' to an 'available for sale security' at a market value of $375m.
4/ In FY2018 there was a $104m write down in the residual value of 'Pendal Group' (p160 AR2018). (Name Change Note: A decade on from the float, following approval from its own shareholders, BT Investment Management Limited (BTIM) changed its company name to "Pendal Group Limited" (PDL.AX) on 27 April 2018).
The accounting value at EOFY2018 of the 10% residual stake on the books was therefore:
$375m - $104m = $271m
5/ In FY2019, WBC continues to own their 10% residual shareholding in Pendal. However it remains on the 'may be sold' list and Westpac has elected to remove any contribution from Pendal from their cash earninmgs (p147 WBC Annual Result Presentation).
-------
The 'capital charge' represents the underlying change in asset value of the component of BTIM/Pendal held by parent company Westpac each year. This is not necessarily the same as the value of that asset on Westpac's books. For example, as a subsidiary, a company's assets are held on the books of Westpac at the price of purchase, irrespective of the current market price.
The numbers in the table below are derived from:
1/ The 30th September share closing price for Pendal Group on the ASX.
2/ The number of Pendal Group shares held by Westpac as listed in the corresponding annual report.
|
Pendal Share Price EOFY |
No. Shares held EOFY |
Value held EOFY |
Implied Book value 'per share' to WBC on Sale Date |
Gross Proceeds: Pendal Shares Sold during Year |
Annual Westpac resultant 'Capital Change' (1) |
FY2014 |
$6.15 |
172,800,001 |
$1,062.720m |
|
FY2015 |
|
|
|
|
$1,036m |
|
FY2015 |
$9.56 |
90,814,493 |
$868.187m |
|
|
$841.467m |
FY2016 |
$8.89 |
90,814,493 |
$807.341m |
|
|
($60.846m) |
FY2017 |
|
|
|
$11.07 (1) |
$630m |
|
FY2017 |
$11.05 |
30,814,493 |
$340.500m |
|
|
$163.159m |
FY2018 |
$8.79 |
30,814,493 |
$270.859m |
|
|
($69.641m) |
FY2019 |
$7.39 |
30,814,493 |
$227.719m |
|
|
($43.140m) |
(1) This figure is calculated from the book valued delivered to WBC after the sale and includes transaction costs. The actual closing price before the ex-dividend day cut off on market was $11.33.
Sample 'Capital Change' Calculation for FY2015
($1062.720m - $868.187m) + $1,036.000m = $841.467m
Notes
(1) 'Capital Change' in the table above is not necessarily reflected in the Westpac accounts of that year in the income statement. This is because:
a/ Capital gain is subject to a 30% corporate tax rate for companies operating in Australia.
b/ Capital changes appear to be only put through the accounts when a capital asset changes its category status. That means either:
1/ Transitioning from a 'subsidiary' to an 'associate' OR
2/ Transitioning from 'associate' to 'available for sale'.
When shares in a business unit do not change status during the year it appears that no 'capital adjustment' based on 'market valuation' is made, unless that asset is now classified as 'Available for Sale'. 'Available for Sale' assets are adjusted for 'fair value' in the Westpac Statement of Profit & Loss every year.
SNOOPY
'Subsidiary', 'Associate' and 'Available for Sale'
Quote:
Originally Posted by
Snoopy
I am attempting to unpick the 'Wealth Management' side of WBC from what is left.
From:
https://www.pendalgroup.com/about/corporate-approach/
We learn that what was "BT Financial Group Australia", a part of Westpac, is an unrelated business to "BT Investment Management Limited" (now Pendal Group Limited), the listed entity.
I need to 'unpick the wealth business' because:
1/ Westpac have cut all financial links with what was the separately listed wealth management arm "BT Investment Management Limited" (BTIM).
This means historical comparisons are going to be difficult from here on in.
'Pendal Group' has over the last five years, at various different times, been classifed by Westpac as:
1/ 'A Subsidiary',
2. 'An Associate' and
3/ 'An Available for Sale Asset.'
Within the Westpac accounts, the accounting treatment of 'Pendal' has changed across the years depending on how it was classified within the accounts.
From the Westpac reporting date at EOFY2015 (30th September 2015) (refer AR2015 p228), 'BTIM'/ Pendal was no longer a subsidiary of WBC.
-------
1/ Subsidiaries
Westpac controls and accordingly consolidates an entity when it is exposed to, or has the rights to variable returns from its involvement with the entity, and has the ability to affect those returns through its power over the entity.
-------
'Consolidates' means that Westpac takes their share of their subsidiary's income and puts it into their own income statement. Similarly Westpac take the values of the subsidiary's assets and liabilities and bring those across into their own balance sheet. However, the change in market capital value of that subsidiary over the year is not reflected in the Westpac income statement nor its balance sheet. Pendal ceased to be a subsidiary of Westpac on 23rd June 2015 when the 60.8% shareholding was sold down to 31%. Pendal then became an Associate.
From AR2017 p225
---------
2/ Associates
Associates are entities in which the group has significant influence, but not control over the operating and financial policies. The group accounts for associates using the equity method. The investments are initially recognised at cost (except where recognised as fair value due to the loss of control of a subsidiary) and increased (or decreased) each year of the Group's share of the associates profit (or loss). Dividends received from the associate reduce the investment in associate.
------
I note that in this case the 'exception' referred to above is what has happened. Control of BTIM/Pendal has been lost as a result of the share sell down by parent Westpac on 23rd June 2015. Accordingly the valuation of BTIM/Pendal shares on the Westpac books reflects the share price at which BTIM/Pendal transitioned from becoming a Subsidiary to an Associate.
------
Under what circumstances would Westpac have the ability to affect returns through its power over an entity? According to the BDO NZ website:
https://www.bdo.nz/en-nz/accounting-...joint-ventures
"If an entity holds a quantifiable ownership interest in an investee and it holds, directly or indirectly, 20% or more of the voting power of the investee, it is presumed that the entity has significant influence, unless it can be clearly demonstrated that this is not the case."
As at 23rd June 2015, Westpac's holding in Pendal reduced from 60.8% to 31%. But 31% is well above the BDO reported 20% 'significant influence' threshold. This means that BTIM/Pendal is rightly classified as an 'Associate' after that previously referred to date.
--------
To be very clear on the difference between 'Consolidating the accounts' (for Subsidiaries) and using the 'Equity method' (for Associates)?
1/ Subsidiary Treatment: Consolidating the financial statements involves combining the firms' income statements and balance sheets together to form combined statements, from the parent's perspective. But this does not preclude any subsidiary from publishing their own set of accounts that are separate from the parent,
2/ Associate Treatment: The equity method does not combine the subsidiary's accounts in the parent's statements. But it accounts for the subsidiary as an 'investment asset' and accounts for any earnings proportionate to the parent's stake in the subsidiary that is received from the subsidiary as 'Other income'. Actual dividends received have to be subtracted from any notional proportional income, as dividends received are separately accounted for under 'Non-interest income' in the income statement.
--------
On 26th May 2017 (during FY2017) Westpac sold a further 19% of Pendal Group reducing their holding to 10%. From AR2017 p249:
"Following completion of the sale , the remaining interest in Pendal Group Limited was reclassified as available-for-sale securities."
3/ Available for Sale
Now here is where things get confusing for me. The vehicle through which Westpac hold their Pendal shares is:
"Westpac Financial Services Group Limited" (Check out 'Pendal Group' AR2018, page 104, reporting WBC 'Available for Sale' holding held by "Westpac Financial Services Group Limited." )
This vehicle is incorporated in Australia. Yet this company is still listed as a 'materially controlled entity' at the end of FY2018 (Westpac AR2018 Note 35 'Investments in subsidiaries and associates' p249), almost 18 months after the Pendal holding was reclassified from being an 'Associate' to something 'Available for Sale'!
There are a couple of possible explanations I can think of to explain this:
1/ It is possible for a shareholding in a separately listed company to be classified as an 'Associate' and an 'Available for Sale Security' at the same time.
2/ 'Westpac Financial Services Group Limited' is a holding company that still contains other assets outside of the Pendal group. For example, at one point in FY2018, 'Westpac Financial Services Group Limited' also held shares in 'Ascalan Capital Managers', which took positions in hedge funds and supplied venture capital.
3/ It is possible that a subsidiary company can be materially controlled, even if it contains a subsidiary within it that is not.
The balance sheet treatment (p124 AR2017) shows 'Available for Sale Securities' and 'Investments in Associates' as mutually exclusive classification boxes. That means my explanation 1/, above, is most likely wrong.
From AR2019 p175
"These equity securities are measured at fair value with unrealized gains and losses recognised in 'Other Comprehensive Income' except for dividend income which is recognised in the income statement"
SNOOPY
'Associate' Stake Revaluation as reported by Westpac
Quote:
Originally Posted by
Snoopy
'Pendal Group' has over the last five years at various different times been described by Westpac as 'A Subsidiary', 'An Associate' and 'An Available for Sale Asset.'
The accounting treatment of Pendal has changed across the years depending on how it was described.
What is no longer clear to me is if the capital value of an 'Associate' is revalued each year. It is clear the value of an 'Associate' is marked to market value when it is first declared as an 'Associate'. But after that the value of the associate on the books is only changed by the dividend flow from the 'Associate' (in this case Pendal) to the parent (in this case WBC). Can anyone confirm?
Westpac report both a "Net Profit After tax" and a "Cash Profit" each year. For employee bonus purposes it is the "Cash Profit" that best recognises the operational performance of the company. From Appendix 1 in the Annual Results Presentation from the respective years, the annual "Cash Profit Adjustment" due to Westpac's Pendal Group Holding is listed in the table below.
Financial Year |
Pendal 'NPAT' to 'Cash Earnings Adjustment' for Westpac |
Explanation |
End Of Year Pendal Shareholding Status for Westpac |
2014 |
|
|
Subsidiary |
2015 |
($665m) |
Sell down of Pendal shares |
Associate |
2016 |
$0m |
No Adjustment |
Associate |
2017 |
($171m) |
Sell down of Pendal Shares |
Available For Sale |
2018 |
$73m |
Mark to Market Loss |
Available For Sale |
2019 |
$45m |
Mark to Market Loss + Separation Costs from Original Sell Down |
Available For Sale |
Calling these 'Cash Earnings Adjustments' looks to me to be a misnomer. For example, The $665m earned from the Pendal share sell down in FY2015 was real cash. Therefore I would argue that it should not be removed to get the "Cash Profit". I do agree that it was not representative of core business earnings though. So I can see why it was removed from the figure used to reward executive bonuses. In fact, I agree with all of the normalising adjustments listed in the table above. But I am surprised they were not declared as 'normalising adjustments', because that is exactly what they are. They are certainly not in general cash earnings adjustments (except for the mark to market changes).
Of particular interest is what happened to the normalising adjustment in FY2016 in the above table: nothing.
This is despite:
1/ Pendal being an Associate over that financial year AND
2/ The share price of Pendal declining from $9.56 to $8.89 for a paper loss on the holding of ($60.846m). AND
3/ Dividends for the year from Pendal to Westpac totalling $34.060m
If we follow the declared position in the Westpac Annual Report regarding dividends received (they are diverted from 'invested capital' to 'income': refer AR2019 p263 "Dividends received from the associate reduce the investment in the associate".), then the 'on the books' capital holding value of Westpac's investment in Pendal should have reduced by:
$60.846m + $34.060m = $94.906m
The fact that no adjustment was ever made over FY2016 is consistent with:
1/ The change in the capital value of an 'Associate Shareholding' being reflected on the Westpac books being recognised ONLY....
2/ ....as the larger stake that was sold down to transform that 'subsidiary stake' into an 'associate stake'.
Before today I had got it into my head that any 'associate stake' owned by Westpac would be revalued year to year, and resulting capital charges would flow through the income statement. However it now appears I was wrong on this point, even though this 'annual revaluation of stake' principle does apply to 'Available for Sale Securities'.
SNOOPY
Summary: Multi year effect of Pendal on Westpac (by Snoopy)
Quote:
Originally Posted by
Snoopy
Subsidiary Treatment: Consolidating the financial statements involves combining the firms' income statements and balance sheets together to form combined statements, from the parent's perspective. But this does not preclude any subsidiary from publishing their own set of accounts that are separate from the parent,
Quote:
Originally Posted by
Snoopy
Associate Treatment: The equity method does not combine the subsidiary's accounts in the parent's statements. But it accounts for the subsidiary as an 'investment asset' and accounts for any earnings proportionate to the parent's stake in the subsidiary that is received from the subsidiary as 'Other income'. Actual dividends received have to be subtracted from any notional proportional income, as dividends received are separately accounted for under 'Non-interest income' in the income statement.
Quote:
Originally Posted by
Snoopy
Available for Sale
From AR2019 p175
"These equity securities are measured at fair value with unrealized gains and losses recognised in 'Other Comprehensive Income' except for dividend income which is recognised in the income statement"
Pendal (was BTIM) Shares Held by Westpac
|
Pendal Dividend to Westpac (recognised in Westpac income statement) |
Capital Revaluation Gain (Loss): Pendal over FY |
Pendal as Associate Book Value EOFY |
Book Value: Pendal as Available For Sale EOFY |
Market Value: Pendal as Available For Sale EOFY |
FY2014 |
$42.568m (1) |
$0m |
N/A |
N/A |
N/A |
FY2015 |
$60.771m |
$1,036m |
$756m (2) |
N/A |
N/A |
FY2016 |
$34.060m |
$0m |
$718m (3) |
N/A |
N/A |
FY2017 |
$37.225m |
$262.5m |
N/A |
$340.5m (4) |
$341m |
FY2018 |
$12.523m |
($69.6m) |
N/A |
$280.1m (5) |
$271m |
FY2019 |
$15.576m |
($43.1m) |
N/A |
$227.1m (6) |
$228m |
Notes
(1) This figure is not found separately in the Westpac AR2014 on the income statement. This is because income from Pendal (or BTIM as it was called then) is subsumed in a whole list of income from 'controlled entities (that) are not wholly owned' (AR2014 p276). The actual BTIM earnings figures in the Westpac report are subsumed in the parent 'BT Financial Group' figure of $2,224m (AR2014 p257,258). The figure in the above table is instead calculated from the BTIM Annual Report for FY2014, knowing the percentage of that company owned by Westpac. At EOFY2014, BTIM was still a 61% owned subsidiary of Westpac. As a majority controlled subsidiary, the independent market capital value of BTIM is not adjusted for annually in the Westpac accounts.
(2) A gain resulted from a Pendal sell down to a 31% holding, in the FY2015 financial year, on 23rd June 2015. This gain occurred when this entity went from from 'subsidiary' to 'associate'. The pre-tax figure of $1,036m ('Business disposed of during the year ending 30th September 2015' AR2016 p222) was documented as being recognised in 'Non-interest Income' (note 4) in the previous year column, retrospecting FY2015, as most of the $1,041m figure listed (AR2016 p134). The after tax gain as a result of the sale would have been: $1,036m x 0.7 = $725m
The post sale carrying value of the remaining Westpac holding in BTIM of $756m in the above table may be found in AR2016 p222, as a retrospective figure for FY2015.
(3) For FY2016 (AR2016 Note 35 'Investment in Subsidiaries and Associates' p222), we read the carrying value of the remaining 31% of Pendal shares owned by Westpac at EOFY2016 to be $718m, This investment was initially recognised at 'fair value' due to loss of control of a subsidiary (in this case after Westpac sold down their controlling shareholding) in FY2019. Subsequently over FY2016, the value increased or decreased each year by the Group's share of the associates profit (or loss). Furthermore dividends received from this associate in exceeded of profits for the year. And that has meant a net reduction in the book value of this associate investment.
We know the number of Pendal shares held by Westpac at EOFY2016 was 90.814m (Pendal AR2016 p125). So we can work out the average 'price per share' on the books:
$718m / 90.814m = $7.91 per share.
The market closing price of Pendal at EOFY2016 was $8.89. So the underlying market value of Westpac's stake in Pendal at EOFY2016 was:
$8.89 x 90.814m = $807m
(4) We now move on to the subsequent FY2017 Pendal sell down by Westpac. A gain occurred here when Westpac's Pendal shareholding was partially sold and the balance of the shareholding retained went from being an 'Associate' to an 'Available for Sale' asset.
The 26th May 2017 'sell down' of approximately 21% of Pendal left a residual holding of approximately 10% ('approximately' because shares issued during the year as part of Pendal executive salary packages means the percentage of shares held by Westpac can change, even if Westpac sells no Pendal shares). The carrying value of Westpac's Pendal shares before the May sell down was $713m (AR2017 p227).
$713m / 90.814m = $7.85 per share.
Why the $5m drop in book valuation from the FY2016 end of year figure? The accounts (AR2017 p227) tell us it is mostly a change in fair value adjustment on the day of acquisition. I cannot explain this apparently retrospective change.
Of the $713m of shares on the books, $417m of that value was sold and $242m retained. The shares remaining and reclassified as 'Available for Sale' amounted to:
$242m / 30.814m = $7.85 per share (remaining balance, book value prior to sale).
However the sales process crystallised returns much higher than book value. The shares remaining now had a market value of $375m (p227 AR2017).
$375m / 30.814m = $12.17 per share (remaining balance, at new book value).
No dividends were paid on these shares for the remainder of FY2017 following them being reclassified as 'Available for Sale' investments.
By EOFY2017, the share price of those remaining Pendal Shares had revalued to $11.05.
$11.05 x 30.814493m = $340.5m
The value of the remaining approximately 10% stake in Pendal, listed as part of the 'Available for Sale' equity investments should total $340.5m in the annual report. This is because now the shares are being classified as 'Available for Sale', that the value on the Westpac books should reflect the market price of these Pendal shares. The actual total of 'Available for Sale' 'Equity Securities' is $465m (AR2017 p151). But as that figure may contain other equity stakes in other investments, it is not inconsistent with the $340.5m Pendal stake figure that I have reported here.
Concomitant with these changes in capital value is the associated change in 'Other Comprehensive Income' for the period. This includes an unrealized gain from 'before the date of the sale' to the 'end of year value' on the residual 'Available for sale' Pendal Shares of:
$340.5m - $242m = $103.5m. (Change in value of the retained shareholding from the start of the year to the end of the year)
We must add to this the realised gain on the 19% stake sold:
$630m - $471m = $159m. (Change in value of the retained shareholding from the start of the year to the time of the share sell down)
This adds to a total profit from the Pendal sell down of:
$105m + $159m = $262.5m.
The actual figure listed in the annual report as 'Net gains on sale of Associates' is $279m (AR2017 p139). This figure is not inconsistent with my calculated total profit from the Pendal sell down. It is possible that this figure includes other associates that were sold down over FY2017.
(5) At EOFY2018 the Pendal share price was $8.79. This represents a capital dollar value of:
$8.79 x 30.814493m = $270.859m
So the capital loss for the year on the Pendal stake was: $270.9m - $340.5m = -$69.6m
Westpac's share of Pendal's 'Total Comprehensive Income' for the year was $21.741m (refer my post 179 on this thread). Subtract from that the corresponding period dividend money paid out to WBC during the year of $12.523m (refer my post 164 on this thread). This gives the incremental 'retained earnings value' ( $21.741m - $12.523m = $9.218m ) that must be added to the book value of the asset.
Change in book value of Pendal shares = $270.9m - $340.5m + $9.2m = -$60.4m
OR $340.5m - $60.4m = $280.1m. This is still consistent with having an end of year total 'Available for sale' equity securities balance of $384m (AR2018, p172), assuming there are other equity securities of some $104m on the books to make up the difference.
(6) At EOFY2019 the Pendal share price was $7.39. This represents a capital dollar value of:
$7.39 x 30.814493m = $227.719m
So the capital loss for the year on the Pendal stake was: $227.719m - $270.859m = -$43.140m
Westpac's share of Pendal's 'Total Comprehensive Income' for the year was $14.993m (refer my post 179 on this thread). Subtract from that the corresponding period dividend money paid out to WBC during the year of $15.576m (refer my post 164 on this thread). This gives the incremental 'retained earnings value' ( $14.993m - $15.576m = -$0.583m ) that must be subtracted from the book value of the asset. It is subtracted because in this unusual circumstance, the dividend payout exceeded the dividend paying company's earnings.
Change in book value of Pendal shares = $227.719m - $270.859m - $0.583m = -$43.723m
OR $270.859m - $43.723m = $227.136m.
The 'Available for Sale' equity securities balance of $134m (AR2019, p176). What can explain this discrepency?
The accounting standard for reporting these matters changed over the year, with reporting now under AASB9. I don't understand how the equity securities balance in the 'parent entity' is calculated. But given it was $67m at EOFY2018 (AR2018 p172) and $66m at EOFY2019 (AR2019 p176), this indicates that in the grand picture of things very little has changed. My guess is that at the 'Consolidated' level, this 'missing' equity securities balance has been moved somewhere else within the consolidated accounts. But at the time of writing this, I don't know where!
EDIT: it now appears the Pendal shares have been transferred to "Trading Securities and financial assets measured at FVIS" (my post 227 on this thread).
(7) Calculation of Market Value of 'Available for Sale' Pendal Asset
FY2017
$11.05 x 30.814m = $341m
FY2018
$8.79 x 30.814m = $271
FY2019
$7.39 x x 30.814m = $228m
The purpose of the above calculations is to contrast the 'market value' of what value of Pendal remains on the books to the 'book value'. Why are they different? Because the book value of Pendal dividend has had the retained earnings for the year added to it, less the amount of retained earnings paid out as dividends. These changes are in addition to any change in the market value of the shares over the year which also must be accounted for, By contrast the market value of the Pendal shares is just that, un-corrupted by any earnings adjustments. And it is the market value that WBC is likely to get if/when they sell.
(8) AASB9 (on 'Financial Instruments') has been adopted from FY2019. This has replaced the previous reporting standard AASB 139 for reporting on all 'Investment Securities' balances. From FY2019 'Available for Sale Securities' are regrouped for balance sheet purposes as part of one category under the 'Investment Securities' banner (AR2019 p138 & p175). Just like under the previous 'Available for Sale Securities' banner, 'Investment Securities' include 'Debt Securities' and 'Equity Securities'. Just like before it is only the latter 'Equity Securities' sub category that is of interest with respect to Pendal shares. Total shares available for sale (including the Pendal stake?) amount to $134m (AR2019 p176).
EDIT: it now appears the Pendal shares have been transferred to "Trading Securities and financial assets measured at FVIS" (my post 227 on this thread).
SNOOPY
Westpac share of 'Associate' or 'Available for Sale' Pendal Profits
Quote:
Originally Posted by
Snoopy
Dividends Paid to Westpac by Pendal Group (PDL.ASX)
When a company has an 'associate' stake in another, dividends from that associate reduce the book value of the associate stake. But alongside that effect, associate profits -in proportion to the share of the associate held- increase the value of the associate stake. It is that share of associate profits that I wish to table here
'Westpac' share of Pendal dividend (column 5) figures are from my post 164.
Financial Year |
Pendal Total Comprehensive Income |
Westpac Pendal Holding EOFY |
Westpac Share of Pendal 'NPAT' |
less Westpac Share of Pendal dividend |
equals Associate (Pendal) Annual Valuation Adjustment |
2014 |
|
60.76% |
|
2015 |
$186.691m |
31.04% (from 23/06/2015) |
$15.718m |
$0m |
$15.718m |
2016 |
$58.981m |
29.54% |
$17.423m |
($34.060m) |
($16.637m) |
2017 |
$154.698m |
8.99% (from 26/05/2017) (1) |
$34.637m |
($37.225m) |
($2.588m) |
2018 |
$224.361m |
9.69% |
$21.741m |
($12.523m) |
$9.218m |
2019 |
$156.994m |
9.55% |
$14.993m |
($15.576m) |
($0.523m) |
(1) Note 'sale of stake' date is one day after the ex-dividend date.
Sample Calculations
FY2015
1/ Split year into two 'equity stake' periods: 266days + 99days = 365days
2/ Split profit into two periods: $136.054m + $50.637m = $186.691m
3/ Work out Westpac share of profit after Pendal becomes an Associate:
(0 x $136.054m) + (0.3104 x $50.637m) = $15.718m
FY2016
1/ Work out Westpac share of profit:
(0.2954 x $58.981m) = $17.423m
FY2017
1/ Split year into two 'equity stake' periods: 238days + 127days = 365days
2/ Split profit into two periods: $100.872m + $53.826m = $154.698m
3/ Work out Westpac share of profit:
(0.2954 x $100.872m) + (0.0899 x $53.826m) = $34.637m
SNOOPY
An unorchestrated 'litigation lot' of liabilities: Part 4
Quote:
Originally Posted by
Snoopy
The 24th November 2019 Westpac press release indicates that Westpac still expect to be fined, for not having the necessary checks on some accounts. However they have rolled out the following $54m dollars worth of 'good corporate citizen' measures:
-----
1/ Funding for the International Justice Mission (IJM): Westpac will match IJM's current level of funding, investing $18 million over three years to tackle Online Sexual Exploitation of Children (OSEC) in the Philippines. This will enable IJM to expand on-the-ground initiatives in Southeast Asia to help end child exploitation.
2/ Funding for SaferKids: Westpac will match the Australian Government's current level of funding for its SaferKids partnership with Save the Children, UNICEF and The Asia Foundation, investing $6 million over six years to raise awareness of Online Sexual Exploitation of Children (OSEC) and support programs to protect children in the Philippines.
3/ Prevention: Westpac will seek the guidance of industry experts, through the convening of an expert advisory roundtable, to develop a program of actions to support the prevention of online child exploitation. Westpac will provide funding of up to $10 million per year for three years to implement these recommendations
-----
In house,
1/ Westpac have closed their "Westpac Australasian Cash Management Product" and "LitePay international funds transfer system". These were two platforms where funds could be transferred with little accountability.
2/ Westpac intend to hire an additional 200 people to add to their financial crime resourcing team. This team has already been boosted by 325, to 750 people over the last three years.
3/ Westpac will invest $25 million to improve cross-border and cross-industry data sharing and analysis to better support regulators and authorities to fight financial crime
Those financial <script src="https://securepubads.g.doubleclick.net/gpt/pubads_impl_2020032401.js" id="gpt-impl-0.981356852904373" nonce=""></script>commitments add up to $79m, excluding Westpac's own incremental internal costs.
The 25th November 2019 Westpac press release contains more details on Westpac's costs for the full support of the anti-pedophile program:
"Westpac has made a number of commitments including to improve its financial crime program, support industry initiatives to enhance financial crime monitoring and provide additional support and resources to organisations that are working to eradicate child exploitation. We estimate these commitments will increase expenses by up to $80 million (pre tax) in FY20 when the majority will be incurred or provided for. These expenses will be included in cash earnings and treated as notable items."
The 'notable items' comment is made in relation to the whole thing being a 'non-operational matter." I would not include it as part of 'normalised earnings'.
I am not sure what kind of fine Westpac may expect as a result of their prior inactions, to be offset by their subsequent make good efforts at least in a judge's eye. I don't think they will get away with a wet bus ticket though. But given that Westpac was a conduit for crime rather than doing the crime themselves, I wonder if it will be somewhat in the order of $20m? That would see Westpac face a total cost of $80m + $20m = $100m for the whole matter. $100m sounds like a good 'headline punishment' to face. Anyone know how this figure compares with existing court precedents?
According to the comment at the end of this article, my total $100m paedophile fine settlement could be some way out:
https://www.finextra.com/newsarticle...undering-rules
"23 million breach occasions @ A$17 - A$21 million penalty per breach occasion is A$391 trillion - A$ 483 trillion."
To put that into perspective, total shareholder funds on hand at EOFY2019 was $65 billion. So potentially WBC could be fined over:
391/0.65 = 600
times the amount of shareholder funds on the balance sheet! That sounds like crazy stuff that would immediately collapse the bank. Hyperbolic surely?
SNOOPY