Peter King vowed to cut Westpac’s cost base by more than $2 billion over the next three years,as it sells businesses,ramps up a digital transformation program,and responds to long-term pressures on returns.Credit:Wayne Taylor
In a move welcomed by investors,Mr King set an aggressive target to slash its cost base to $8 billion by the 2024 financial year,from $10.1 billion at the end of September last year. He said Westpac would hit the target by making more services digital,offloading non-core businessess,more than halving the number of products it sold,and cutting spending on contractors,head office roles and office space.
Westpac shares surged 5.1 per cent to $26.25,despite some scepticism in the market about whether the cost targets would be achieved.
Mr King did not say how many jobs or branches would be affected by the cost cutting,but the Finance Sector Union warned it expected an acceleration in branch closures.
Mr King said the bank was benefiting from the improving economy,but a key driver of the cost-cutting was a threat to profits from ultra-low interest rates and the likelihood of stiff competition. “In running a bank at the moment,the big positives are:credit growth is going to pick up;capital generation is good;and bad debts and credit quality is very good,” Mr King said in an interview withThe Sydney Morning Herald andThe Age.
“But the reason in part for that is the low interest rates and where that comes through is the fact that net interest margin will come down if rates stay ultra low. And that’s what we’ve seen in banking around the world,so it’s not like the Australian banks will be different,” he said.
“We’re also expecting that we’ll have competition from different players and non-banks as well as digital players in and around our business.”
Net interest margins (NIM),which compare banks’ funding costs with what they charge for loans and are a key influence on profits,tend to be squeezed by low interest rates. In the latest half,however,Westpac’s NIM rose by 6 basis points to 2.09 per cent compared with the December half,helped by a fall in deposit rates.