Westpac Paying For Its Board's Unwise Optimism
The Age
Wednesday May 20, 1992
WESTPAC'S board has a lot to answer for. It chose to take a less conservative view of the world than its peers and now Westpac shareholders will pick up the tab for that mistake.
Thankfully, the damage is confined to shareholders and Westpac's corporate reputation and ego.
The instant affirmation of Westpac's credit rating by Standard & Poor's and the confirmation from the Reserve Bank of the bank's capital adequacy demonstrate concern about perceptions of the effect of yesterday's numbers and ought to provide reassurance for depositors that the losses represent nasty scars rather than deep wounds.
The $2323 million of total losses that Westpac announced yesterday didn't surface overnight. The bulk of them relate to problem loans that have been problems for some time but that the bank stubbornly refused to recognise as problems.
The bank counted on an earlier and stronger recovery in the economy here and offshore and an associated recovery in property markets at the same time as National Australia Bank and ANZ and the Commonwealth were taking an increasingly pessimistic and, as it has transpired, more realistic view of the value of their problem loan assets.
While Frank Conroy said yesterday that the new basis for valuation that produced the devaluations had been caused by a less optimistic view of the timing of recovery in the property sector, the only ones who appear to have been optimistic about the timing of recovery were the Westpac directors.
THE degree of their optimism was shown by the fact that the values now being used to create specific provisioning are a massive 38 per cent below book values. Bankers are not supposed to be optimistic, they are supposed to be prudent.
The sharemarket has recognised increasingly that Westpac is different and got it right despite Westpac's consistent protestations about the adequacy of its levels of provisioning. Westpac was priced in anticipation of loan losses approaching the magnitude of those announced yesterday.
The ravaging of Westpac's balance sheet revealed yesterday represents the accumulation of problems previously unrevealed. The bank now has almost $10,000 million of assets over which there is some form of question mark _ approaching 10 per cent of its balance sheet.
Shareholders will now have to fill in some of the holes through the $1200 million rights issue and will be doing so on terms that make the issue very expensive capital for the bank. Had it owned up to its mistakes earlier and progressively, the bank should have had the opportunity to raise capital on better terms. It will go to the market as the last in and worst-dressed of the majors.
The board has presided over one of the worst periods in the bank's history. Westpac was once the country's biggest and strongest and is now the smallest and weakest of the majors.
It failed to recognise or own up to the extent of the mistakes it had allowed to occur. It has produced what must surely be the biggest nominal loss by an Australian company still standing. It deserves every word of criticism it is going to receive and if, shareholders have any sense, they will ask for more than a mea culpa.
Having finally, if belatedly, bitten the bullet, Westpac is now in a position to move forward. While its capital ratios ahead of the equity raising are thin, the bank isn't in any jeopardy.
Indeed, the experience of the US banks in recent times has been that a clearing of the decks which is demonstrably thorough, removes uncertainty and concern and enables the process of rebuilding to start.
The Westpac exercise does appear to be thorough. Its problems are heavily property-based. By valuing its property exposures at current market, along with its own direct property holdings and indeed its equity investments, Westpac has swept the rubberiness from its numbers.
Given that Westpac will have to produce a prospectus for its rights issue _ and that the Westpac board would be fully aware of the implications of prospectus disclosure and liabilities _ there is a secondary reason for believing that this Westpac result represents a conservative view of reality.
The decision to display the skeletons in its closet will enable the market to focus on Westpac's future profitability rather than speculate about the impact of the past _ although the cost of funding the massive portfolio of non-performing loans will depress Westpac's profitability for a long time to come.
Westpac's mistakes were classical mistakes. Every significant problem in the banking system this century has been based on imprudent levels of exposure to property markets. Just like the two most recent precedents _ Bank of Adelaide and the CBC _ the bank's own mistakes have been compounded by the behavior of its non-bank subsidiaries.
Unlike the Bank of Adelaide, Westpac has proved to be big enough and strong enough to cope with the massive losses of its finance subsidiary, AGC, and its other property-lending non-bank subsidiaries.
Westpac has now pumped the best part of $1000 million of capital into AGC in a year as well as taking $1000 million of development property assets out of AGC over that period. AGC has lost more than $800 million in the past 12 months.
One has to assume that, barring a further collapse in the property market _ and Westpac will have to be careful about its plans for an orderly liquidation of its portfolio _ the property-based haemorrhaging will slow to a trickle.
Westpac said yesterday that there was no growth in non-accruals in its underlying business and that the $1114 million increase in non-accruals in the March half was due to the more conservative approach taken to existing problem exposures.
That is consistent with the experience of the rest of the banks, where the growth in non-accruals peaked in the September half, although there was a puzzling increase in Westpac's early warning sectors of its problem assets _ loans that are 90 days past due.
Against that, the level of loans that aren't classified as non-accrual but where serious doubt exists about their full compliance with loan agreements, does appear to have peaked.
One of the more interesting features of the Westpac announcement is that it plans to pay a dividend.
Given that it hasn't raised the $1200 million of new capital it is seeking and may not until September this year _ and without an underwriting it cannot be absolutely certain that it will _ why is it allowing $166 million of capital to escape the bank?
It is all right for the bank to say that its underlying operations are profitable, but there is something odd about paying out funds and then asking for multiples of them back within five months.
The other broader issue that emerges from the result is the need for the Reserve Bank to accelerate its moves to produce standards for treatments and disclosure by the banks so that no bank in future will be able to act quite as ``differently" as Westpac.
There will always be a large degree of subjectivity in determining prudent levels of provisioning but the basis of valuations and the definitions of non-peforming loan categories and their treatment can be standardised and tightened, and the sooner that occurs the better.
© 1992 The Age
