Executive Summary / Key Takeaways

• Westpac Banking Corporation ($WEBNF) is undergoing a profound strategic transformation, shifting from a period of simplification and risk remediation to focused growth, underpinned by a massive technology overhaul. The multi-year "UNITE" program aims to radically simplify its technology stack, driving efficiency, enhancing customer experience, and reducing operational risk.
• Despite a competitive and inflationary environment, Westpac delivered a statutory net profit of $7 billion in FY2024, with a return on tangible equity of 11%. The second half of 2024 showed positive momentum, with core net interest margin expanding by 3 basis points and net profit rising 9%.
• The company maintains a robust balance sheet, boasting a CET1 ratio of 12.5% (pro forma 12.11% after buybacks), placing it in the top quartile globally and providing substantial capital flexibility. This strength supports ongoing share buybacks and future growth initiatives.
• Westpac is strategically re-weighting its growth focus towards higher-returning Business and Institutional segments, which saw lending growth of 9% and 8% respectively in FY2024, while maintaining discipline in the intensely competitive mortgage market.
• Key risks include persistent inflation, intense mortgage competition, and geopolitical uncertainties, though management anticipates a manageable rise in credit stress and projects Australian GDP growth to accelerate to 2.5% in 2025.

A Legacy Reimagined: Westpac's Strategic Evolution

Westpac Banking Corporation, with roots tracing back to 1817 as the Bank of New South Wales, stands as a cornerstone of the Australian financial landscape. Over its long history, Westpac has evolved into a diversified financial services provider, serving a broad spectrum of clients across Australia, New Zealand, and select international markets. The company is currently in the midst of a significant strategic overhaul, transitioning from a multi-year period focused on resolving legacy issues and simplifying its portfolio to a renewed emphasis on disciplined growth and enhanced shareholder returns. This transformation is crucial for Westpac to solidify its position in a dynamic and highly competitive banking sector.

The Australian banking sector, dominated by the "Big Four" (Commonwealth Bank (CBA), NAB (NAB), ANZ (ANZ), and Westpac), faces a complex interplay of forces. Recent industry trends indicate persistent margin pressure amid falling interest rates and stiff competition for both loans and deposits. The sector saw underwhelming profit results in 2024, with modest EPS growth forecasts of 1% to 2% annually over the next five years, and average Net Interest Margin (NIM) decreasing by 7 basis points to 1.80% across major banks in FY2024. Technology expenses across the majors increased significantly by 15.2% to $8.9 billion in FY2024, reflecting the ongoing digital imperative. Against this backdrop, Westpac's strategic pivot is designed to enhance its competitive standing and drive sustainable value.

Technological Edge and Operational Transformation

At the heart of Westpac's strategic reinvigoration is the ambitious "UNITE" program, a business-led, technology-enabled simplification initiative. This program is designed to radically streamline the bank's operations, aiming to cut its technology stack by two-thirds, from approximately 180 components down to around 60. This is not merely a cost-cutting exercise but a fundamental re-architecture intended to deliver a better customer experience, make systems easier for bankers, and ultimately increase shareholder returns. Westpac's CEO, Peter King, emphasized that while their technology is not older or less capable than peers, "we just have too much of it".

The tangible benefits of UNITE are already emerging. An identity verification initiative, for instance, is consolidating 22 disparate processes into a single, streamlined system, with 18 consumer processes already integrated. This is expected to cost $25 million but yield $15 million in annual savings, while also improving the success rate for new-to-bank customers and ensuring compliance with scam prevention commitments. The program also includes the consolidation of three deposit systems into one, a move expected to reduce complexity and lower project costs. Furthermore, UNITE has commenced 39 initiatives, including the decommissioning of Midas, a 38-year-old system that supported New Zealand financial markets. Westpac expects UNITE to account for 35% to 40% of its estimated $2 billion annual group investment envelope from 2025 to 2028, with approximately 75% of this investment expensed. This sustained investment underscores the company's commitment to building a more agile and efficient banking platform.

Beyond UNITE, Westpac has made significant strides in digital innovation. The Westpac app has been rated the #1 mobile banking app by Forrester. The company has introduced "EFTPOS Air," which turns a phone into a merchant terminal, and "EFTPOS Flex," a cost-effective merchant terminal integrating with over 500 point-of-sale systems, leveraging its first-mover advantage in payments innovation. For institutional clients, the "Westpac One" digital transaction banking platform is under development, with a pilot expected in late 2025. In the critical area of security, "SaferPay" and "Westpac Verify" were launched in FY2024, preventing customers from losing $237 million to scammers. Westpac is also piloting "Westpac SafeCall" in collaboration with Optus, providing verified in-app calls to customers. These technological advancements are foundational to Westpac's strategy of delivering superior service and efficiency across its diverse customer base.

Segmental Performance and Strategic Focus

Westpac's financial performance in FY2024 reflects the early successes of its strategic shift and disciplined execution. The company reported a statutory net profit of $7 billion, a 3% decrease, but excluding hedging volatility, net profit was $7.1 billion. Return on tangible equity stood at 11%. Revenue increased by 1%, driven by robust loan growth across all key segments and effective margin management. Net interest margin (NIM), excluding notables, saw a slight 1 basis point decline, primarily due to intense competition in the consumer segment. Expenses, however, rose by 7%, largely due to higher technology costs, including software amortization, and costs associated with winding down RAMS. Impairment charges were notably low at 7 basis points of loans, reflecting prudent lending practices and customer resilience.

The second half of 2024 demonstrated strong momentum. Net profit increased by 9% to $3.6 billion (3% excluding notables), and the core net interest margin expanded by 3 basis points to 1.83%. The cost-to-income ratio edged up to 51%, while return on tangible equity rose 43 basis points to 11.4%, exceeding the cost of capital.

• Consumer Banking: This segment faces the most intense competition. While consumer deposits grew 8% and mortgages were up 5% in FY2024, the NIM declined 18 basis points over the year (though it rose 1 basis point in H2 2024). The return on tangible equity for the Consumer segment was 9%, which management acknowledges is below desired levels due to competitive pressures. Westpac is focusing on improving service, with mortgage approval times cut to less than 5 days, and enhancing digital offerings like the #1 rated Westpac app. Australian mortgages grew 2% in H2 2024, or 3% excluding the $3.5 billion decline from the RAMS runoff, aligning with system growth.
• Business Banking: This segment is a key growth area. Business loans grew 8% in FY2024, with overall lending up 9%. The Biz Edge program is digitizing lending processes, reducing processing times by 5 days. Investment in bankers and payments innovation, such as EFTPOS Air and EFTPOS Flex, has driven growth in transactional account openings. Business deposits increased by $4 billion in H2 2024, with term deposits now comprising over one-third of total business deposits. Australian business lending grew 6% in H2 2024, with strong performance in health, professional services, and agriculture.
• Institutional Banking: Westpac is repositioning WIB as a leading domestic institutional bank, achieving solid revenue growth and maintaining a strong 14% return on tangible equity in FY2024. Lending was up 9% for the year, primarily to existing customers across property, infrastructure, and industrials, without compromising margins or risk. Margins, excluding markets, increased by 4 points to 2.10%. The segment holds the #1 position for government deposits and was recognized with 9 KangaNews Awards, including #1 bond house in Australia and New Zealand. Average interest-earning assets grew 20%, reflecting increased lending and trading inventory.
• New Zealand: Operating in a challenging economic environment, the New Zealand segment achieved modest balance sheet growth and a 1% rise in core earnings in FY2024. Return on tangible equity was a solid 13%. Lending edged up 1%, with mortgages growing at 0.3x system, as the bank balanced volume and margin. Mortgage customers are, on average, 11 months ahead on repayments, and stress in the business sector was lower than expected.

Financial Health and Capital Strength

Westpac's balance sheet is exceptionally strong, a testament to years of disciplined management. Its Common Equity Tier 1 (CET1) ratio stands at 12.5%, placing it in the top quartile of global banks. This robust capital position supported an additional $1 billion increase in the share buyback program in FY2024, with approximately $1.7 billion remaining from previously announced buybacks. The pro forma CET1 ratio, after announced but uncompleted buybacks, is 12.11%, providing $2.7 billion of capital above the top end of the target operating range. This excess capital offers significant flexibility to support growth, assist customers, and absorb potential external shocks.

Liquidity has also significantly improved, with liquid assets now comprising 19% of total assets. Customer deposits have risen from 57% to 67% of total funding, reducing reliance on wholesale funding from 35% to 26%. In H2 2024, Westpac raised $22 billion in new long-term wholesale funding, capitalizing on favorable credit markets. Impairment provisions are $1.5 billion above the base case scenario, including a 42.5% weighting to the downside scenario, reflecting a conservative approach to credit risk. The long-run loan loss charge is now estimated to be in the mid-teens, down from historical highs, due to improved portfolio quality and macro-prudential settings.

Full-year ordinary dividends increased by 6% to $1.51 per share, with a payout ratio of 73%, at the upper end of the medium-term range of 65% to 75%. The Board's decision to prioritize buybacks over a special dividend reflects a conservative stance amidst global uncertainties.

Outlook and Strategic Imperatives

Westpac anticipates an improving Australian economy, with GDP growth projected to increase from 1.5% to 2.5% in 2025. Credit growth is expected to be approximately 5% in housing and 7% in business for 2025. The Westpac Melbourne Institute Consumer Survey recently rose to a 2.5-year high, indicating reduced consumer pessimism. Westpac's economics team forecasts a 25 basis point interest rate cut in February.

However, management acknowledges ongoing headwinds. Mortgage competition and deposit trends are expected to persist into H1 2025. While returns on hedge deposits and capital will contribute positively to NIM, this contribution is likely to be slightly lower as the peak of the replicating portfolio rate has passed. Expense growth is projected to continue at a similar pace into H1 2025, driven by higher technology costs, salary and wage growth, and UNITE investments, partially offset by cost reset savings. The major benefits from the UNITE program are expected by FY2028, which is critical for improving the overall cost-to-income ratio over the medium term.

The new CEO, Anthony Miller, is expected to prioritize the completion of the UNITE program, improving the Consumer business's profitability, and expanding the Institutional and New Zealand portfolios. Westpac's strategy emphasizes consistent service and targeted growth in higher-returning segments rather than aggressive market share grabs in highly competitive areas like mortgages.

Competitive Dynamics and Market Positioning

Westpac operates within a highly competitive Australian banking sector, primarily vying with Commonwealth Bank of Australia (CBA), National Australia Bank (NAB), Australia and New Zealand Banking Group (ANZ), and Macquarie Group (MQG).

• Against CBA: CBA, known for its digital prowess and strong brand, reported an 8% increase in net profit after tax to $10.116 billion for FY2025, with revenue up 5% to $28.29 billion. Its CET1 ratio was 12.2% in H1 FY2025. While Westpac is making significant strides in digital transformation with its UNITE program and highly-rated app, CBA is perceived to have a lead in digital innovation and customer experience, particularly in faster online transaction processing. Westpac's broader international presence offers a unique value proposition, but CBA's stronger domestic brand loyalty can lead to higher customer retention.
• Against NAB: NAB reported a 2% decline in Q1 FY2025 cash earnings to $1.74 billion, despite a 3% revenue growth, due to higher credit impairment charges. Its H1 FY2025 cash earnings fell 2.3% year-over-year, with NIM contracting 3 basis points to 1.69%. NAB's FY2024 cash earnings fell 8.1% year-over-year, with a CET1 ratio of 12.35%. Westpac competes effectively in business banking, offering flexible loan products and international transaction services. However, NAB's strong focus on agribusiness and sustainability initiatives could provide it with sector-specific efficiencies.
• Against ANZ: ANZ's H1 FY2025 cash earnings increased 6.7% to A$3.64 billion, though its NIM fell 1 basis point. In FY2024, ANZ's Institutional Division achieved record revenue and profit, and its ANZ Plus platform saw customer numbers grow 85% to nearly 850,000. ANZ has invested approximately $2.5 billion in technology over the past five years. Westpac's market positioning is similar in international banking, but its integrated digital platforms for retail customers offer a unique value proposition. ANZ faces an additional operational risk capital overlay from APRA, highlighting Westpac's progress in risk management.
• Against Macquarie Group (MQG): MQG, primarily an investment bank, reported a 5% increase in full-year net profit to A$3.715 billion for FY2025, with a 30% rise in H2 FY2025 net profit. Its Banking and Financial Services (BFS) segment saw loan book growth of 17% and deposit growth of 21%. While MQG leads in investment banking and asset management, Westpac's comprehensive retail and everyday banking services offer broader accessibility. Westpac's diversified operations provide strategic adaptability, but it must address digital innovation gaps to match the pace of specialized players like MQG.

The broader Australian banking sector faces challenges from stiff competition for loans and deposits, coupled with elevated operational costs, which are expected to keep profitability subdued. Technology expenses are a significant driver of costs across the industry. Westpac's UNITE program is a direct response to these competitive pressures, aiming to enhance efficiency and customer experience to better compete with peers who may have more streamlined legacy IT systems.

Risks and Challenges

Despite its strong position, Westpac faces several risks. The Australian economy, while resilient, is experiencing below-trend growth, with consumer and business spending patterns reflecting subdued activity. While a modest rise in unemployment is expected, a prolonged period of high interest rates could lead to slower economic growth if discretionary income remains constrained. Geopolitical uncertainties, including global conflicts and upcoming elections, pose risks of supply chain disruptions and inflation, which could impact Westpac's outlook.

Mortgage competition remains intense, putting pressure on margins in the Consumer segment. Although the rise in mortgage arrears has slowed and stabilized in H2 2024, some further deterioration in credit quality is anticipated, particularly if economic conditions worsen beyond current forecasts. The cost of providing cash services, approximately $330 million annually, is becoming less economical as volumes decline, necessitating industry-wide solutions. Furthermore, the successful execution of the ambitious UNITE program, with its multi-year investment and complex consolidation efforts, is critical to achieving the projected cost savings and operational efficiencies.

Conclusion

Westpac Banking Corporation is executing a compelling strategic narrative centered on digital transformation and disciplined growth. The "UNITE" program represents a significant commitment to simplifying its technological foundation, promising enhanced customer experiences, operational efficiencies, and long-term shareholder value. This ambitious overhaul, coupled with a strong balance sheet and a strategic re-focus on higher-returning Business and Institutional segments, positions Westpac to thrive in a competitive and evolving financial landscape.

While the company faces ongoing challenges from market competition, inflationary pressures, and global uncertainties, its proactive approach to risk management, robust capital position, and clear technological roadmap provide a solid foundation. Investors should monitor the execution of the UNITE program, the trajectory of NIM in a dynamic interest rate environment, and the bank's ability to translate its digital investments into sustained market share gains and improved profitability, particularly in the Consumer segment. Westpac's journey from simplification to strategic growth, underpinned by technological leadership, presents a compelling long-term investment thesis.