Westpac also benefited from an improvement in its interest rate margin, as the Sydney-based bank reduced the interest rate it was paying on deposits in line with the fall in official interest rates over the course of the last year.
But rather than celebrate those two good things, King and his CFO, Michael Rowland, have made it clear that their focus now is to prepare the nation’s second-largest bank for the challenges of a low interest rate environment. extended.
King warned that although the bank has managed its interest rate margins well over the past six months, “at some point low interest rates are going to bite.”
Meanwhile, Rowland pointed out that Westpac could no longer count on further cuts in deposit rates, for the simple reason that around 60% of the bank’s Australian deposits are now valued at 0.25% or less, it doesn’t So there is not a lot of leeway to push. the lowest.
“While there is wiggle room for deposits, we think it’s limited,” he said.
Likewise, the bank’s financing costs were also reduced thanks to the Reserve Bank’s term financing facility, which allowed banks to borrow funds over three years at the extremely low rate of 0.1%. .
But Westpac only has $ 12 billion more than it can tap into that facility, which ends at the end of June.
Meanwhile, stiff competition among lenders, especially in the hot housing market, is putting downward pressure on home loan margins.
It’s not like there is a magic solution. We are just disciplined, know the business, think about it and renovate our processes.
– Peter King, CEO of Westpac
And the pressure on prices is not limited to new loans. Westpac’s home loan portfolio is feeling a squeeze in margins as rival lenders offer special discounts to encourage people to refinance their mortgages.
The surge in the popularity of fixed rate home loans is also putting pressure on margins.
In the six months to March 2021, 37% of Westpac’s new home loans were fixed rate loans, on which the bank gets a lower margin.
A year earlier, Westpac’s mortgage portfolio was heavily biased towards variable rate loans, which made up 77% of the portfolio, compared to just 23% of fixed rate mortgages.
The pricing of loans, of course, is not the only factor determining which banks are able to gain share in the important housing market. Potential borrowers also place a strong emphasis on getting a quick credit decision.
Westpac’s slow turnaround times had caused it to lose market share. But the bank made a major effort to streamline the mortgage approval process, which allowed it to improve its performance in the six months leading up to March.
But King has been careful to avoid the usual jargon used by management consultants, who like to talk about “redesigned processes,” or “reconfigured systems.”
Instead, he used much more humble language to describe Westpac’s approach to simplifying its home loan approval process, eliminating duplication and reducing the number of client documents and forms.
“What we’re doing behind the scenes is – and I use that word – renovating our processes,” King explained.
“So we’re really looking from start to finish, we reorganize the order, we change the policies where they don’t make sense. Looking at how we’ve put in place responsible lending controls is an important part – and simplifying them. “
He added, “We call them one percent internally, but there are a lot of little things that add up. So there is a lot of one percent.
“It’s not like there is a magic bullet. We are just disciplined, know the business, think about it and renovate our processes. “
It is precisely this methodical and pragmatic approach of the bank that will be essential to success in an era of low interest rates and increasing pressure on margins.
And as King pointed out, continuing the simplification process is an important prerequisite for Westpac to reduce its cost base through increased use of technology.
“A major reset is needed to ensure that the company is competitive in the long run, especially as we navigate the recovery phase of the pandemic and in a prolonged low-rate environment,” he noted.
“We need to do things differently to offer a competitive cost base, including redesigning and digitizing many of our processes.”
Westpac has announced a three-year program of ambitions that will reduce its cost base to $ 8 billion by 2024.
This mantra of simplification is being rolled out across Westpac more widely as it abandons its erstwhile ambitions to offer a wide range of products and maintain a presence in an array of exotic locations.
The bank is quickly abandoning its non-core specialist businesses – it has already made deals to sell a number of businesses, including its general and mortgage insurance business for lenders, as well as its Westpac Pacific businesses.
And it is also consolidating its offshore presence and focusing its international operations in key locations in Singapore, London and New York.
As King explained, “Geographically, we are consolidating our Asian business in Singapore. Jakarta and Mumbai are now closed and we plan to leave Beijing, Shanghai and Hong Kong next year. “
The author owns shares in major banks.