Westpac cuts dividend following ‘disappointing’ full-year result, launches $2.5 billion capital raising

Shareholders in Westpac Banking Corporation (ASX: WBC) will cop a lowered annual dividend after the bank reported a 16% slide in profits to $6.78 billion for the 2019 financial year.

The nation’s second largest bank has confirmed it will cut the year’s final fully-franked dividend by 15% from $0.94 to $0.80 per share for the first time in a decade due to a “challenging low-growth, low-interest rate environment”.

The cut will bring the full-year dividend to $1.74 per share, down from $1.88 per share in 2018.

The news follows Friday’s announcement that Westpac’s net profits were down for the fifth time in the past 10 years, impacted by $658 million in customer remediation costs following the Banking Royal Commission and a $172 million realignment of the bank’s Wealth business.

The bank is now reaching out for fresh equity capital in a $2.5 billion share placement and purchase plan to new and existing investors in an effort to boost its balance sheet and support future growth.

“This [dividend cut] decision was not easy as we know many of our shareholders rely on our dividends for income,” Westpac chief executive officer Brian Hartzer said.

“However, we felt it was necessary to bring the dividend payout ratio to a more sustainable medium term-range given the capital raising and lower return on equity.”

Pay cuts

Shareholders weren’t the only ones to feel the sting of poor results – Westpac’s board also moved to dock the executive team’s short-term bonuses after failing to meet financial and non-financial performance indicators for the period.

Mr Hartzer stood to earn an estimated $4.03 million bonus on top of his current salary of $5 million.

His salary is down from the previous year’s $6 million (which included a bonus) and was reduced in response to shareholder concerns following release of the bank’s annual remuneration report.

Challenging conditions

Mr Hartzer said while the bank had weathered a “disappointing year”, it was not all gloom and doom.

“Importantly, 2019 has also been a watershed year where we’ve acted decisively to respond to the challenging conditions,” he said.

“We’ve progressed a number of recommendations from the Royal Commission and our own internal assessments, and continued our focus on putting things right for customers.”

The bank established a hub in 2017 to speed the remediation process, and has since paid out around $350 million in refunds to more than 500,000 customers as part of a “get it right, put it right” initiative.

Re-setting the company for the future remains a priority, in particular further strengthening the bank’s balance sheet in a low interest rate environment and dealing with potential uncertainties.

“We expect $500 million of productivity savings in the next financial year as well as another $200 million from the Wealth reset, including the exit of our [personal] financial planning business,” he said.

“This will be partly offset by an incremental spend on improving risk management over the next two years.”

Share placement

This morning, Westpac launched a fully-underwritten institutional share placement and non-underwritten share purchase plan which is expected to provide a buffer against potential costs imposed by the Australian Prudential Regulation Authority (which maintains the stability and integrity of the banking, insurance and superannuation industries) and the “earnings headwinds” of low interest rates and higher compliance costs.

The $2 billion share placement will be offered to sophisticated Australian and overseas investors at a fixed $25.32 per share and will result in 79 million new shares being issued, representing approximately 2.3% of Westpac’s existing issued capital.

Share purchase plan

Under the share purchase plan, eligible Westpac shareholders will have the opportunity to apply for up to $30,000 in new, fully-paid ordinary shares to raise a targeted $500 million.

Mr Hartzer said the exercise will help finance regulatory actions flowing from the Royal Commission and future industry reviews and investigations which are expected to require “significant investment and management attention”.

“The capital raised will increase our buffer above APRA’s unquestionably strong [capital ratio] benchmark of 10.5%, position us to respond to potential future impacts on capital, and continue to lend and support the economy in the event of a downturn,” he said.

Westpac’s shares were placed in a trading halt today to enable the placement to be completed.

At mid-afternoon, shares in Westpac were steady at $27.88.