Westpac tells regulators that new bank rules will come at a cost

The Australian 12:00am December 10, 2016

Michael Bennet

Westpac chairman Lindsay Maxsted has urged the regulator to be wary of the impact on the economy when implementing stricter incoming capital rules, arguing banks were having to raise lending rates to share the cost of higher capital requirements.

After this week’s national accounts revealed the first negative quarter of GDP since 2011, Mr Maxsted said there was a risk of focusing on the abundance of “negative and often self-serving rhetoric” from critics of the big banks.

“There is no doubt that there have been examples of poor behaviour and instances where the industry has fallen short of community expectations,” he told shareholders at the bank’s annual meeting in Adelaide yesterday.

“(But) in the midst of this criticism it is important to have a balanced debate ... ultimately, our banks make a significant contribution to the economy.”

Despite the quarterly 0.5 per cent contraction in the economy, Mr Maxsted, who is also a director of BHP Billiton, said GDP was likely to grow a “little more” than 3 per cent in the next year as unemployment holds below 6 per cent.

Chief executive Brian Hartzer, who suffered a 6 per cent protest vote against his share bonus, said credit growth would next year be “broadly similar” to the 5.4 per cent in the past 12 months, while the bank’s lending books were performing well overall.

He also repeated his call for state and federal governments to assist growth though “longer-term pipeline” of infrastructure projects, especially roads and transport, predicting businesses would become more confident to borrow and invest.

“Barring large individual company issues, we expect credit ­quality to remain generally favourable, while recognising there will continue to be challenges in selected industries and regions,” he said.

Mr Hartzer added the bank had been monitoring the potential apartment glut in east coast cities for many years, predicting that while an “individual project or two” may experience settlement problems, a major spike in bad debts was unlikely.

Credit quality is the “key swing factor” for bank profits in 2017, Morgan Stanley analyst Richard Wiles said yesterday.

Even though risks were “skewed to the downside”, Westpac was the most likely of the major banks to deliver a “positive surprise” on bad debts after last year’s 49 per cent spike to $1.1 billion.

For the year to September 30, Westpac’s cash profit and final dividend were flat at $7.8bn and 94c, respectively, taking the annual payout to $1.88.

Mr Maxsted conceded the bank’s dividend payout ratio of 80 per cent was “a little higher than what we consider to be optimal” for its growth and return on equity outlook, which were being reduced by higher capital requirements.

After Westpac this week raised rates on interest only loans by eight basis points, Mr Maxsted said requiring the banks to “materially” increase capital levels was positive for the nation, but “does come at a cost”.

He said shareholders had worn part of the pain through lower returns and flat dividends, while more expensive loans for customers also impacted the economy by tying up resources that could be directed to “other productive uses”.

It came as mid-tier lender Bendigo and Adelaide Bank late yesterday hiked variable mortgage rates for both owner-occupiers and investors as more lenders reprice their home loan book in the biggest out-of-cycle rate moves in more than a year.

National Australia Bank, ANZ and Suncorp this week also hiked rates for property investors.

With lending competition expected to remain intense, Mr Maxsted said Westpac’s growth would be heavily influenced by the outcome of looming global regulatory capital reforms and the domestic push to ensure banks were “unquestionably strong”.

“It is important that we get these changes right, particularly at a time when our economy is in need of both confidence and investment,” Mr Maxsted said.

The global regulatory body, the Basel Committee, will next month unveil a major overhaul to how banks assess the riskiness of loans, which some analysts believe could require the big four banks to raise billions of dollars of fresh equity.

The Australian Prudential Regulation Authority will combine the Basel reforms with the Murray inquiry’s recommendation to make bank capital levels unquestionably strong, It will unveil new rules late next year which will take effect in late 2018.

The regulatory uncertainty comes after APRA’s increase to the big banks’ mortgage “risk weights” last year, prompting the big four to raise $17bn from shareholders and then offset some of the blow by hiking mortgage rates out of cycle to the Reserve Bank.

Amid heightened scrutiny of executive pay, Mr Maxsted defended the bank’s remuneration policies. He said short-term incentive payments for executives were cut last year. They didn’t meet hurdles for long-term incentives issued in 2013, thus received no shares for them.

Mr Hartzer last year received a higher pay packet of $6.75m, up from $5.74m, as fixed pay and total share-based rewards rose, and because he was only chief executive for part of the previous year.

About 95 per cent of shareholders yesterday approved the bank’s executive remuneration report, a far better result than the 16 per cent protest vote last year.

Mr Maxsted said the bank’s new ROE target was “challenging” enough and executives would have done well to achieve it. Like rivals, Westpac tweaked the bank’s pay structure by abandoning the cash earnings per share hurdle for long-term incentives in favour of ROE of between 13.5-14.5 per cent.

Mr Hartzer recently reduced the bank’s ROE target to 13-14 per cent, down from 15 per cent set by former chief executive Gail Kelly.