Westpac more than adequate to cover its risk exposure

Westpac Banking Corporation (Westpac or ‘the group’) is one of the four major banks in Australia and oneof the largest banks in New Zealand. Westpac offers banking and financial services such as retail,corporate, commercial, and institutional banking. It also provides wealth management and advisoryservices. The group is the leading institutional bank in Australia. Strong market position provides Westpacwith brand recognition and helps it gain acceptance for new products. However, natural disasters thathave already happened and possibly could happen in the coming years, could affect the group’sprofitability.StrengthOne of the Leading Franchises in New ZealandStrong Market Position in Australian Banking IndustryAdequate Capital to Cover its Risk ExposureWeaknessLack of Geographic Diversification Puts the Group atCompetitive DisadvantageIncreasing Share of Interest Income in Total IncomeMay Increase Rate RiskOpportunityRegulatory Changes Regarding Covered Bonds CouldEase Refinancing PressuresExpansion Into Asia Likely to Increase Revenues andMarket Share of WestpacThreatRegulatory Changes Could Increase ComplianceSpending and Alter Business PlansNatural Disasters Could Affect ProfitabilityIntense Competition in Australia Likely to Affect theProfitability of WestpacStrengthOne of the Leading Franchises in New ZealandWestpac is one of the New Zealand’s largest banks, providing a range of retail banking products, wealthmanagement and commercial banking services to customers. It provides a full range of banking, wealthmanagement and insurance products, serving around 13.4 million customers and small to medium sizedbusiness customers. It is one of the largest lenders of housing finance and a major provider of wealthmanagement services in New Zealand. The group has more than 193 branches and 628 Westpacbranded Automatic Teller Machines (ATMs) operating over the World. The group’s strong market positionin New Zealand well compliments its Australian franchise.Strong Market Position in Australian Banking IndustryWestpac is one of the four major banking organizations in the Australian banking industry. The group hadan asset base of AUD839,202 million at the end of FY2016. Westpac is one of the four major bankingorganizations in Australia based on market capitalization and cash earnings. The group has significantleadership across product categories. For instance, the group is the leading institutional bank in Australia.Westpac Banking CorporationSWOT AnalysisWestpac Banking Corporation© MarketLinePage 20Within the institutional banking sector in Australia, Westpac has been recognized as the lead domestictransactional bank for 13 consecutive years ending FY2016. It is also a major lender in housing financeand business finance. The group’s strong market position enables it gain economies of scale benefits.Adequate Capital to Cover its Risk ExposureWestpac’s capital strength is more than adequate to cover its risk exposure as measured by regulatorycapital ratios such as Tier 1 ratio and total capital adequacy ratio. The group’s Tier 1 ratio stood at 11.2%in FY2016, as against 10.3% in FY2012. Additionally, Westpac’s total capital adequacy ratio sustainedimproving trend by standing at 13.1% in FY2016, as against 11.7% in FY2012. The group’s capitalposition is more than adequate to cover its risk exposure as calculated under Australian regulatorystandards.WeaknessLack of Geographic Diversification Puts the Group at Competitive DisadvantageWestpac lacks the geographic diversification in terms of its revenues. The group is highly dependent onthe Australian and New Zealand markets. During FY2016, Westpac derived over 98.3% of its revenuesfrom these markets. The group’s domestic market, Australia, alone accounted for 87.3% of total revenuesin FY2016. Though the group has presence in the pacific Islands, Asia, America and Europe, revenuesfrom the overseas operations are negligible. Lack of geographic diversification puts the group at adisadvantage compared to its global peers. Geographic concentration of revenues is making the groupvulnerable to risks associated with the Australian economy. The group is also losing out on opportunitiesdue to lack of active presence emerging markets.Increasing Share of Interest Income in Total Income May Increase Rate RiskWestpac is prone to higher levels of interest rate fluctuations, as it derives major portion of its revenuesfrom interest income. Net interest contribution to total income rose from 69.5% in FY2012 to 72% inFY2016. Increasing share of interest income in the total income makes the group vulnerable to theinterest rate fluctuations and contraction of interest margins.OpportunityRegulatory Changes Regarding Covered Bonds Could Ease Refinancing PressuresIn 2011, the Australian government released draft legislation amending the Banking Act of 1959 to allowissuance of covered bonds by financial institutions in Australia. The proposed law reversed the long-standing opposition by the Australian Prudential Regulation Authority (APRA, the bank regulator) tocovered bonds. The government’s draft “Banking Amendment (Covered Bonds) Bill 2011” proposedmeasuring covered-bond pool assets as a percentage of a bank’s total Australian assets, and raised thecovered bond limit to 8% from the 5% suggested in an earlier government report. The 8% limit translatesto potential issuance of around AUD150 billion by Australia’s four major banks, Australia and NewWestpac Banking CorporationSWOT AnalysisWestpac Banking Corporation© MarketLinePage 21Zealand Banking Group Limited (ANZ), Commonwealth Bank of Australia (CBA), National Australia BankLimited (NAB), and Westpac Banking Corporation (WBC). Following the regulatory amendment, thegroup’s carrying value of the covered bonds on issue was AUD33,529 million at the end of 2015. Thiscould ease the pressure on Australia’s major banks to refinance their existing AAA-rated governmentguaranteed debt, most of which matures in 2017.Expansion Into Asia Likely to Increase Revenues and Market Share of WestpacWestpac is accelerating its organic growth strategy in Asia. In 2008, the group launched Shanghaibranch, following banking license from Chinese authority that would allow the firm to conduct business inShanghai. China, being the world’s new growth engine, would provide Westpac with a stronger capabilityto assist Australian and Chinese customers operating in Shanghai. The branch office also caters to smalland medium sized business customers through services such as import and export settlement. During2011, Westpac and The Export-Import Bank of China (China Eximbank) signed a general cooperationagreement to promote close cooperation. In the same year, the group opened its new branch in Beijing tofurther support its growing number of corporate and institutional customers in China. In 2012, Westpacexpanded its operations to India by opening maiden branch at Mumbai, India. During 2013, Westpacreceived approval from The People’s Bank of China to act as a market maker for direct trading of A$/CNYon the China Foreign Exchange Trading System. Further, Westpac opened its first sub-branch in theShanghai Free Trade Zone in 2014. In 2015, the group and DBS Bank entered into a new and extendedATM network partnership, to offer all their region-wide customers access to the networks of Westpac andDBS Bank automated teller machines (ATMs) across Asia. Later, Westpac and CIMB Group establisheda partnership to deliver access to CIMB Group ATMs without ATM withdrawal fees for Westpaccustomers throughout Indonesia and Malaysia. During 2016, the group entered into a strategicpartnership with Bank of the Philippine Islands (BPI) to facilitate low cost and fast transfer of funds toPhilippines from Australia. Further, Westpac entered into a strategic partnership with UnionPayInternational (UPI), a subsidiary of China UnionPay, to enhance the online payment channels. Currently,the Australian financial services provider has a regional presence in China, Singapore, Hong Kong andJakarta, Indonesia. The group’s expansion in to Asia would enable it to leverage growth potential offeredby the growing Chinese and Indian banking sectors and it further reduces risks.ThreatRegulatory Changes Could Increase Compliance Spending and Alter Business PlansRegulations are becoming increasingly extensive and complex. During the recent past, there have been aseries of regulatory releases from Australian authorities in the various jurisdictions in which the groupoperates or obtains funding. This includes global Over the Counter (OTC) derivatives reform and recoveryand resolution planning requirements proposed by the FSB, as well as other components of the USDodd-Frank legislation (including the Volcker Rule) which is designed to reform the entire system for thesupervision and regulation of financial firms that operate in or have a connection with the US, includingforeign banks like Westpac. In addition, the Basel III framework came into effect from January 1, 2013.Westpac is also subject to several regulations across geographies that could have an impact on itsstrategy, and financial performance and health.Westpac Banking CorporationSWOT AnalysisWestpac Banking Corporation© MarketLinePage 22Natural Disasters Could Affect ProfitabilityThe group’s insurance operations are significantly exposed to the risk of natural disasters. For instance, inFY2008, the group earned life insurance premium of AUD630 million and a release of AUD1,776 millionfrom favorable changes in insurance liabilities. However, in FY2009, and FY2010, the group earned apremium of AUD470 million and AUD501 million respectively but booked a charge of AUD402 million andAUD446 million respectively due to higher claims (increased natural disasters) and unfavorablemovements in life insurance liabilities. Similarly, the group recorded higher claims in FY2012 (AUD897million), FY2013 (AUD1,297 million) and FY2014 (AUD857 million) while the premium income wasAUD637 million, AUD761 million, and AUD881 million in FY2012, FY2013, and FY2014, respectively dueto increased catastrophic events. Further in FY2015, the group earned a premium of AUD1,002 millionand paid AUD833 million as of claims. Moreover in FY2016, Westpac earned a premium of AUD1,114million but claims further increased to AUD849 million. Natural disasters that have already happened andpossibly could happen in the coming years, could affect the group’s profitability.Intense Competition in Australia Likely to Affect the Profitability of WestpacThe Australian financial system is characterized by a large number of players, both traditional and new,and well-developed equity and corporate bond markets. The domestic competitive landscape includes thefour major banks, regional banks, building societies and credit unions, foreign entrants to the Australianmarket, local and global investment banks and fund managers, private equity firms, insurance companiesand third party distributors offering products and services to consumer and business customers,encompassing retail, business and institutional banking, funds management, superannuation, insurance,investment and stock broking services. The group faces strong competition from Commonwealth Bank ofAustralia, Australia and New Zealand Banking Group and National Australia Bank, which together withWestpac, form the top four banks in the Australian banking industry. Added to it, a number of foreignplayers entered the Australian market. Such intense and wide-ranging competition may put pressure onWestpac’s profitability and market share.