Westpac Banking Corp. expects its costs to be higher than previously estimated as it accounts for rapid inflation and regulatory expenses.
The Australian bank cut expenses by 7% in the fiscal year ended Sept. 30 to A$9.4 billion, thanks to reduced staff count, smaller network and decreased spending on technology.
Westpac in 2021 announced plans to reduce costs by 40% to A$8.0 billion by the year ending September 2024, but it now expects its overall costs in the fiscal year to total A$8.6 billion.
"We have made good progress in reducing costs and it remains a top priority for the company," Westpac CEO Peter King said during the bank's Nov. 7 earnings presentation.
"Higher inflation is having a significant impact along with the war for talent, which is also pushing up salaries," King said, adding that the cost adjustment "gets the balance right between productivity and investments," though the bank is still aiming to "deliver a step down in costs over the next two years."
Westpac now assumes inflation of about 3% by the end of 2024, against its prior assumption of 2.5%, according to a press release. Australia's consumer price index rose 7.3% in September, according to government data. The Reserve Bank of Australia raised its benchmark cash rate by 25 basis points to 2.60% on Oct. 4 as part of a series of hikes from the start of the year as it aims to return inflation to the 2% to 3% range over time.
Little surprise
"We are not surprised Westpac has had to move the goal posts on its ambitious cost target of A$8 billion by fiscal 2024," said Nathan Zaia, an equity analyst at Morningstar. "Excluding notable items and businesses earmarked for sale, the target implies around A$800 million in cost savings, or 8.5% of fiscal 2022 costs. Our unchanged forecasts of an underlying cost base of around A$9 billion is still 5% higher than the new guidance."
Westpac reported a 1% year-over-year decrease in cash earnings to A$5.28 billion for the year to Sept. 30, versus a year-over-year increase of 105% in the fiscal year ended Sept. 30, 2021. The bank booked A$1.29 billion in charges, including a A$1.12 billion after-tax loss on the sale of Westpac Life Insurance Ltd. and other provisions.
The bank expects increased economic uncertainty and volatility in 2023 as its net interest margin, or NIM, was down to 1.87% from 2.02% in fiscal 2021. Analysts expect rising interest rates to push the bank's NIM higher in the coming quarters and help earnings.
"Westpac's financial profile will remain strong despite economic uncertainties," S&P Global Ratings said in a Nov. 7 note. "Over the next two years, earnings should remain robust, benefiting from improving interest margins on the back of rising interest rates."
