So will Westpac follow their Big Four peers down the buyback route in its full year results on November 1, after revealing a $1.3 billion hit to earnings from writedowns and other bookkeeping measures?
There’s no doubt investors and analysts have been expecting Westpac to follow its peers down the buyback track and many indicated yesterday that they saw no reason for the bank not to even after the surprisingly sizeable impact on earnings for the half from write downs and other costs.
Westpac shares fell 1.6% to $25.63 yesterday as investors got the underlying message from the write down – that low interest rates are making it harder for it and other banks to lift earnings.
The bank told the ASX Tuesday, the bank said the biggest hit to profit would come from $965 million in write-downs in assets in its institutional business.
These write-downs were mostly intangible assets, and included all of the goodwill in Westpac Institutional Bank, and capitalised software, the bank said.
It is taking a further $172 million in extra provisions for customer refunds, payments, associated costs and provisions for legal action.
Westpac said there will be a further $267 million impact from the transaction costs and an asset write-off relating to the sale of Westpac Life Insurance Services, the bank said, adding that this had been previously disclosed
Asset impairments are based on their prospective future cash and earnings potential. These values are tested against models that look at future economic growth and interest rates.
An impairment means these assets are no longer worth as much because their future cash generation (and therefore earnings) are forecast to be lower than previously thought.
The current record low interest rates and the fact these will continue until 2024 would have been a big factor in the impairment test and the outcome
This indicates Westpac thinks the assets will earn less in the future than they did in past years, or that the software has been made redundant by improvements, updates or new processes (such as cloud computing).
Westpac said the notable items are estimated to reduce the group’s Common Equity Tier 1 capital ratio by around 15 basis points, while noting that the write down of goodwill and capitalized software has no net impact on regulatory capital as they were already capital deductions.
The charges associated with the notable items were partly offset by a $55 million gain on the sale of Westpac General Insurance, and $54 million for the reversal of previous write downs associated with Westpac Pacific as the business is no longer held for sale.
Westpac reported interim cash earnings of $3.537 billion for the March 31 half year, up 256%.
Cash earnings for the 2019-20 financial year were down 62% at $2,608 billion because of the impact of Covid and the higher provisions for bad and doubtful debts (which didn’t eventuate and have been written back an boosted this year’s results).
The 2018-19 year was pre-Covid and Westpac reported full year cash earnings of $6.849 billion. That’s best comparison year for the forthcoming 2020-21 results.