Westpac Leads Charge In Further Remediation

This story features WESTPAC BANKING CORPORATION, and other companies. For more info SHARE ANALYSIS: WBC

Westpac Banking Corp has recognised more salaried adviser remediation and brokers suspect this may just be the start of further provisions across the banking sector.

-In addition to wealth advice, 50% of the refunds relate to consumer and business loans
-Not yet able to finalise reliable estimates of refunds for aligned advisers operating under BT Financial licences
-Westpac's methodology highlights disparities with other wealth managers
 

By Eva Brocklehurst

Further customer remediation provisions have been flagged by Westpac Banking Corp ((WBC)) for FY19 and brokers suspect there is more negative news to come.

Credit Suisse is disappointed, having expected that Westpac had moved through the majority of its banking-related remediation, while the potential for more aligned dealer group remediation – for fees-for-no-service – is greater than first thought. Morgan Stanley agrees there is a risk that remediation could be higher and drag on for longer than expected.

The bank will take additional provisions of around -$260m with its first half result for customer remediation for banking and salaried financial planners. In addition, Westpac is expected to take further provisions for aligned planners, confirming that $966m of fees have been collected over the period in question.

The bank has stated that salaried planner customer remediation provisions now represent 28% of fees generated by these planners since 2008. Westpac is finding it difficult to estimate the potential remediation requirements, particularly as many planners no longer work under BT Financial licences and may have left the industry.

Westpac has advised that remediation provisions in consumer and business banking comprise a large proportion of customers with interest-only loans, where the bank failed to switch back to principal & interest at the end of the term.

UBS is alarmed by this, as interest-only loans peaked at 50% of Westpac's mortgage book in FY17. UBS holds dividend forecasts flat at present but remains concerned about the rise in the dividend pay-out ratio. The broker is keeping an eye on the rapid deterioration in the housing market, which is around 68% of the bank's loan book.

Macquarie increases its remediation forecasts for all major banks over the next four years, resulting in FY19 estimates being downgraded -3-5% across the board. The broker agrees, given the near-term pressures, that Westpac's pay-out ratio of 88% is elevated and there may be a need for dilutive dividend reinvestment plans or a reduction to the dividend.

Sector Indications

Citi suggests Westpac is not alone, but appears to be moving ahead of its peers. While FY19 is shaping up as disruptive year the broker believes the bank continues to deliver core earnings growth of 2% and is managing costs.

Macquarie considers remediation charges low-quality expenses and does not incorporate them directly into fundamental valuations. However, recognising the capital implications, the scope for capital returns by the banks is considered to be diminished.

Westpac's disclosure has provided a useful benchmark for the potential remediation relating to aligned networks across the sector. The bank has indicated that obtaining the required documentation for the cohort of advisers that are known in this part of its platform is challenging.

Macquarie finds it difficult to have a more constructive view on the sector until external conditions begin to improve. The broker recognises that benchmarking to Westpac carries the risk of using overly conservative estimates from one operator, but with a lack of additional information, at this point this appears to be the most reliable way to go.

Wealth Management Disparity

Following Westpac's update Macquarie has reviewed the current remediation landscape for wealth managers and has unearthed a disparity between the amounts estimated/provided for by AMP ((AMP)) and IOOF ((IFL)) with Westpac's methodology. The broker continues to envisage a risk that additional provisions will be raised by both AMP and IOOF.

Extrapolating per-adviser remediation across the wealth manager adviser base implies a material shortfall compared with current and expected provisions made by these two listed operators. With respect to timing, Macquarie expects provisions are more likely to be raised in the second half of 2019.

To apply its remediation calculation to fee revenue the broker concedes AMP is solely calculating for advice and this may explain some of the variance. There may also be an element of conservatism in Westpac's numbers, or a higher proportion of inappropriate advice remediation.

FNArena's database shows two Buy ratings, three Hold and three Sell for Westpac. The consensus target is $27.09, signalling 4.2% upside to the last share price. Targets range from $22 (Deutsche Bank) to $33 (Morgans, yet to comment on the update). The dividend yield on FY19 and FY20 forecasts is 7.2% and 7.4% respectively.

Disclaimer: the writer has shares in the company.

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