2005 First Half Results 040505 FINAL - Westpac · 3 2005 Interim Results Presentation Title & Date Robust revenue growth in excess of expenses 0 1,000 2,000 3,000 4,000 5,000 1 H0

2005 First Half Results

5 May 2005

David Morgan Chief Executive Officer

Philip Chronican Chief Financial Officer

Presentation Title & Date 2005 Interim Results 2

Profitable and resilient growth

• Strong cash earnings per share up 12%

• Revenue driven result operating income up 8%

• Cash return on equity improved 21%

• Higher sustainable dividend up 17%

• Solid margin performance margins down 8bps

• Productivity improved cost to income 120bps lower

All comparatives on prior corresponding period


Robust revenue growth in excess of expenses

0

1,000

2,000

3,000

4,000

5,000

1H00

2H00

1H01

2H01

1H02

2H02

1H03

2H03

1H04

2H04

1H05

Revenue 8%

Expenses 4%

Core earnings 12%

1. Underlying basis (excl. significant items but not adjusted for acquisitions and disposals)

2. Excluding goodwill amortisation

5 Year CAGR 1

2

Revenue and expense performance ($m)


Solid contribution across all businesses

-200 0 200 400 600 800

Group BusinessUnit

New Zealand

Institutional Bank

BT Financial Group

Business &Consumer Banking

1H04

2H04

1H05

Cash earnings ($m) Growth1H04 – 1H05 (%)

1. NZ growth in NZ dollar terms

1

17%

33%

23%

8%

Na


Disciplines maintained

• Strategic discipline

- Focused on areas generating the greatest value

• Pricing discipline

- Strong spread performance despite competitive intensity

• Cost discipline

- Contained cost growth while absorbing additional investment and compliance spend

• Risk discipline

- Prudent credit and risk approach


Successfully managed the growth / margin mix

• Disciplined response to more intense competition:

- Prepared to forego unprofitable growth

- Resisted participation in unsustainable price competition

• Aggressive pricing• Higher broker

commissions

• Selective pricing adjustments

• Held broker commissions• Maintained risk/reward

standards

Australian mortgages

• Two-year fixed rate price war

• Chose not to compete head-on

• Responded with higher rate on alternative term

NZ Mortgages

• Many new online accounts with rates at or above the cash rate

• Max-i Direct - Tiered rate product- Top rate in line with

cash rate

Australian deposits

Change in market

Response


BCB – a revenue led result

• Cash earnings up 17%

• Revenue growth twice expense growth

• Profitable growth

- Slower asset growth 8%

- Margins little changed

• Reconfigured deposit products

• Consumer customer satisfaction up 3% over the year

BCB Cash Earnings1 ($m)

511

567546

619647

690

757

0

100

200

300

400

500

600

700

800

1H02 2H02 1H03 2H03 1H04 2H04 1H05

14% 3 year CAGR

1 Data prior to 2002 not comparable due to business unit restructuring.


New Zealand – growth in a tough environment

• Cash earnings up 8% in NZ dollar terms

• Solid lending growth, up 13%

- Mortgage lending up 15%

- Business lending up 8%

• Housing margin compression offset in part by strong deposit margins

NZ Housing market share monthly (%)

-15%

-10%-5%

0%

5%10%

15%

20%25%

30%

Feb-00 Feb-01 Feb-02 Feb-03 Feb-04 Feb-05

Share of Growth Market Share

0

5

10

15

20

25

30

35

2000 2001 2002 2003 2004

SME Deposit share * SME Lending share

NZ SME share (%)

* 2004 data from TNS following change from ACN


Institutional Bank – broadening revenue base


• Strengthened customer relationships through transactional business

• Specialised Capital Group continued to grow

- $4.6bn in FUM

- Hastings Diversified Utilities Fund

• Strong deal flow

• Sound financial markets income

Revenue Contribution ($m)

0

20

40

60

80

100

120

140

Finan

cing

Inte

rnat

ional

Pro

ducts

FM S

ales

FM T

radin

g

Struct

ured F

inan

ce

Transa

ctio

nal

Mar

ket S

ales

Spec. C

apita

l Gro

up

1H04

1H05


BT Financial Group – building strong momentum


• Significant business momentum, with integration behind us

• Continued top-quartile fund performance

• Innovative new products launched

• Additional mandates:- FUM $40bn (up 6%) - Platform FUA $27bn (up

48%)02468

10121416182022

Mar-00

Sep-00

Mar-01

Sep-01

Mar-02

Sep-02

Mar-03

Sep-03

Mar-04

Sep-04

Mar-05

Corporate SuperWrap

Wrap and Corporate Super FUA ($bn)

BT Core Fund vs S&P/ASX300 Accumulation Index

-1.5%

-1.0%

-0.5%

0.0%

0.5%

1.0%

1.5%

2.0%

Jun-0

2

Sep-0

2

Dec-0

2

Mar

-03

Jun-0

3

Sep-0

3

Dec-0

3

Mar

-04

Jun-0

4

Sep-0

4

Dec-0

4

Mar

-05

-8%

-6%

-4%

-2%

0%

2%

4%

6%

Monthly Active Return (rhs)

Yearly Active Return (lhs)


Step-up in dividend trajectory

• Increased dividend by 7 cents or 17%, reflecting:

- Strong earnings growth

- Confidence in outlook

• Envisage maintaining consistent dividend path of at least a 2 cent increase per half

6159 59 59

62 6163 62 63

61

65

50

55

60

65

70

1H00

2H00

1H01

2H01

1H02

2H02

1H03

2H03

1H04

2H04

1H05

Payout ratio (%)

Dividends per share (cents)

2628

3032

34 3638

4042

44

49

10

15

20

25

30

35

40

45

50

55

1H00

2H00

1H01

2H01

1H02

2H02

1H03

2H03

1H04

2H04

1H05

14% 5 YR CAGR


Long-run consistency in growth and returns

Economic profit ($m)

0

200

400

600

800

1,000

1H00

2H00

1H01

2H01

1H02

2H02

^1H

032H

031H

042H

041H

05

^ Underlying EP excludes significant items in 2002

15% 5 year CAGR

• Consistently strong performance

• True to form on managing growth/margin mix

• Maintained franchise investment

• Cash earnings per share up 12%

• Return on equity 21%

• Delivering value to shareholders with higher dividend

The Details

5 May 2005

Philip Chronican Chief Financial Officer


Revenues continue to drive earnings

Movement in cash earnings ($m)

1,233

1,380

(122)

4

(109)

326

48

800

900

1,000

1,100

1,200

1,300

1,400

1,500

1,600

1H 2004 CashEarnings

Revenue OperatingExpenses

Bad Debts Tax and OEI Hybrid EquityImpacts

1H 2005 CashEarnings


Net interest income

Net interest income analysis ($m)• Net interest income increased 9%- 13% growth in average interest

earning assets

- Offset by 8 bps spread contraction

• Modest slowing of growth in 1H05 with smaller margin decline

• One-off factors increased net interest income in 1H05:- $9m from change in broker

commission amortisation

- $15m in GST recoveries on broker commissions

2,339

2,545

248 35

(8)119

106

(56)

1,200

1,400

1,600

1,800

2,000

2,200

2,400

2,600

2,800

3,000

1H04 BalanceSheet

Growth

Spread Hybrids FreeFunds

1H05

Tax equivalent gross-up


Loan growth

11% 175188194Net loans and acceptances

Key contributors

Australia

28

25

36

7

92

2H04

30

28

37

7

94

1H05

0%7Personal (loans & cards)

8%88Housing 2

Change1

13%

23%

10%

1H04- 1H05

34Business

23Institutional Bank

27New Zealand ($NZ)

1H04$bn

1. Percentage changes have been calculated before rounding of numbers2. Grossed up for mortgages securitised


Analysis of margin movements

Group margins 1H04 – 1H05 (%)

2.48%

(2bps)

2bps

(1bps)(2bps)(2bps)

(3bps)

0 bps2.56%

2.3

2.4

2.5

2.6

2.7

1H04 Assetspread

Asset mix Depositspread/mix

Fundingmix

Hybrids Other Free funds 1H05

Spread decline – 6 basis points


Non-interest income analysis

16

1,522

1,659

38

3126

28

(2)

1,64329

(40)

11

1,400

1,450

1,500

1,550

1,600

1,650

1,700

1,750

1,800

No

rmal

ised

1H

04

Fin

anci

alM

arke

ts

BT

FG

Au

stra

lia

Car

ds

no

n-

inte

rest

inco

me

Hig

h Y

ield

Sec

uri

ties

Po

rtfo

lio

Oth

er c

ore

no

n-

inte

rest

inco

me

gro

wth

No

rmal

ised

1H

05

Un

it t

rust

con

solid

atio

n

Po

licyh

old

er t

axre

cove

ries

2004

TP

S h

edg

eim

pac

t Ep

ic

Rep

ort

ed 1

H05

Adjusted growth 8%

Non-interest movement 1H04 – 1H05 ($m)


Expense to income – downward trend continues

4950

50

535251

53

5455

58

35

40

45

50

55

60

1H00

2H00

1H01

2H01

1H02

2H02

1H03

2H03

1H04

2H04

1H05

Group - expense to income %

354045505560657075

1H00

2H00

1H01

2H01

1H02

2H02

1H03

2H03

1H04

2H04

1H05

35404550556065

1H00

2H00

1H01

2H01

1H02

2H02

1H03

2H03

1H04

2H04

1H05

Banking – expense to income %

Total Wealth – expense to income %

48.4%

47.8%

54.3%

Note: Pre BT acquisition – data not comparable. Data for 2000 does not include NZ wealth business.


Expenses – continued tight management

• Expenses, adjusted for non-core items increased 4.4%

• Benefited from prior restructuring of cost base

• Held expense growth low while absorbing:

- project costs expensed $80m

- compliance spend $7m

(8)Consolidation of Epic

(16)$NZD impact

(1)(2) Consolidation of Life Company MIS

6%1,9252,034Operating expenses

1,924

1H04

4%2,008Adjusted operating expenses

% Change1H05$m


Movements in capitalised software

• Major investments in Reach, Pinnacle and the One Bank Platform are the major drivers of the increase

68

409

1H05

57

328

1H04

47Half-yearly amortisation

377Capitalised software

2H04$m

6658393Standardised platform (One Bank)

377

169

29

45

76

2H04

328

173

21

33

62

1H04

5

3

3

Amort-isationperiod (years)

173Other

33Teller platform, New Zealand

52Customer relationship management (Reach)

85Loan process re-engineering (Pinnacle)

409

1H05

Total

Capitalised software - major projects $m


Cost efficiency offsetting compliance spend

198

29

113

29

18

9

2006(f)

85Productivity improvement programme

21

147

14

18

9

2005(f)

Cumulative total

Wealth integration

Other efficiency initiatives

Lending processes

Outsourcing

Cost Efficiency Pipeline $m

511Other

10134Basel II

25

3

3

5

Expectedin 2H05

5013Total

251Anti-Money Laundering

53Sarbanes Oxley

54IFRS

Expected spend

after FY05

Spend in 1H05

Major compliance projects1

$m

1. Includes project spend capitalised


Bad debt component analysis

203207Total

1441Dynamic provision

(84)(67)Write backs & recoveries

149146Write-offs

12487New specific provisions

1H052H04

1H 05

New business/composition change $37

Factor changes $ 8

Write-back of credit related

litigation provision ($31)


Forward credit indicators in good shape

1.40

0.90

0.50

1.271.47

0.75 0.73

0.0

0.5

1.0

1.5

2.0

2.5

1999 2000 2001 2002 2003 2004 1H05

Aust. Business Banking - 90 day delinquencies (3 month moving average) (%)

Consumer: Housing & unsecured credit - 90 day delinquencies (%)

1.03

0.820.63

0.901.14

0.96

1.98

1.021.070.96

0.210.160.150.150.230.250.260.38

0.64

1.04

0.0

0.4

0.8

1.2

1.6

2.0

1996 1997 1998 1999 2000 2001 2002 2003 2004 1H05

Consumer unsecured Housing

• Increase in housing delinquencies from:

- Easing in loan growth rate

- Temporary collections backlog due to early Easter break

• Consumer increased moderately in the half:

- Maturing of Virgin card portfolio

- Lower personal loan balances


Mortgage lending – targeting profitable growth

• Mortgage income up 10%

• 8% growth with spreads 1 basis point lower

• Mortgage growth below system partly due to:

- Reduced sales productivity

- Below weight broker lending

- Below market growth in Low-doc lending

• Initiatives to enhance growth underway with some improvement evident

1.171.181.181.22

1H052H041H042H03

Australian mortgage spreads (%)

Mortgage applications (weekly average vs target )

24/1

2/04

07/0

1/05

21/0

1/05

04/0

2/05

18/0

2/05

04/0

3/05

18/0

3/05

01/0

4/05

15/0

4/05

29/0

4/05

Target

Trend line (Avg Daily Apps/week)


Retail deposits – balancing the product and price mix

• Achieved competitive growth of 6% with modest spread contraction

• Strategy responded to customer needs:

- Grew term deposits in 2004

- Westpac One – 130,000 new accounts since November 2004

- Launched Max-i Direct - $3bn growth in cash management balances since March 2004

2.60

1.56

2H03

2.772.812.76Business Deposits

1.591.621.66Consumer Deposits

1H052H041H04

Deposit spreads

01020304050607080

2H03 1H04 2H04 1H05

Business deposits

Consumer deposits

Deposit growth ($bn)


Business lending – solid growth

1.781.801.791.81Business

Equipment Finance

2.152.0212.162.33

1H052H041H042H03

• Maintained market share in total business credit, with growth of 15% comprising:

- Institutional lending up 23%

- SME and Middle Market lending up 10%

• Lending slower in latest half:

- 65% of annual loan growth typically occurs in the second half

- Maintained growth/return disciplines

- Lending redesign project diverted resources in first quarter

10.0%

10.5%

11.0%

11.5%

12.0%

12.5%

13.0%

2H03 1H04 2H04 1H05

Business Credit Market Share - Australia

Source: RBA, Westpac

Australian business spreads (%)

1 Spread in 2H04 impacted by repurchase of portfolio of equipment finance loans under the terms of the sale of AGC to GE Capital Finance in 2002


Strong institutional loan growth

• Lending within the Institutional Bank increased 23% over the period

• Strong loan growth across all sectors

• No change in the average risk grade of the portfolio

• Margins lower from tighter credit spreads

• Financing (term and bridging) margins down from 61bps to 50bps

27.931 March 2005

(0.6)Other

0.2Asset finance

1.1Warehoused assets

0.5International

0.8Bridging finance

3.3Term lending

22.631 March 2004

Institutional loans & acceptances ($bn)


Financial markets – sound performance

• Improved customer flow increasing sales and trading opportunities

• Particularly strong foreign exchange performance – up 77%

• Solid financial markets performance without taking additional risk

Financial markets income ($m)

Monthly average VaR ($m)

0

3

6

9

12

15

18

Mar03 Sep03 Mar04 Sep04 Mar05

Monthly average VaR Board Limit

0

50

100

150

200

2H03 1H04 2H04 1H05FX Capital Markets Other


Group business unit

• No change to composition of Group business unit over year

• Result lower from:

- Revenue from Treasury down $41m over year

- $30m tax charge relating to prior period activities

• 2004 TPS hedge has no impact on cash earnings but reduced operating income by $40m

(93)73195Tax & OEI

11(76)(78)(68)Other eq.distr.

Na4524(18)Operating income

(16)

40

(4)

11

29

1H05

43

-

(15)

61

16

1H04

73(25)Bad debts

Na37Cash earnings

large102004 TPS rev

(82)111Core earnings

8187Operatingexpenses

% Change1H04 -

1H05

2H04$m


Strong capital generation

5.1%5.2%

166 bps

(4 bps)(36 bps)

32 bps

(41 bps)

(106 bps)

4.00

4.50

5.00

5.50

6.00

6.50

7.00

Mar-04 CashEarnings

Dividends RWAgrowth

DRP/Staff

issues

Buy backs Other Mar-05

1. $287m APRA defined deferred expenditure not deducted from ACE ratio

2. “Other” includes capital employed by non-banking subsidiaries, Specialised Capital Group investments and movements in the FCTR and deferred tax balances

Target ranges

ACE: 4.50 – 5.00%

Tier 1: 6.00 – 6.50%

Movements in ACE1 ratio (%)

2


Capital – above target capital ranges

Capital ratios and target ranges (%)

3.0%3.5%4.0%4.5%5.0%5.5%6.0%6.5%7.0%7.5%8.0%

Mar

-00

Sep-0

0M

ar-0

1Sep

-01

Mar

-02

Sep-0

2M

ar-0

3Sep

-03

Mar

-04

Sep-0

4M

ar-0

5

ACE Tier 1

• Strong capital generation has increased capital flexibility

• New IFRS capital directives from APRA unresolved:

- Treatment of hybrids

- Innovative equity levels

- Grandfathering/transition arrangements

- Treatment of bad debt reserve

• Additional capital management initiatives on hold pending clarity APRA treatment


Higher dividend – sustainable path

• Dividend up 7 cents or 17% to 49 cents, fully franked

• Step-up in dividend delivers a higher pay-out

• Future dividend trajectory expected to remain at least at 2 cents per half

• Strong franking position maintained

• Capital ratios above target ranges

• Ensure dividend growth broadly in line with cash EPS growth

• New share issues do not dilute EPS in medium term

• Consistency in dividend path given more volatile earnings under IFRS

• Full franking

• Market feedback for a higher payout

• Strong capital position

OutcomeKey considerations


Preparing for New Zealand incorporation

• Agreed to incorporate systemically important operations in NZ

• Incorporation model yet to be determined. Westpac intends to operate a branch and an incorporated entity concurrently

• Impact on earnings and capital for the group is yet to be quantified, but is expected to be manageable

• Required legislative change will impact timing


Structured finance transactions – update

• NZ Structured Finance transactions have been under review by the New Zealand Inland Revenue Department (IRD) since 2003

• Amended assessments received relating to 1999 and 2000 years

• Maximum potential exposure of NZ$711m (tax effected and including interest) up to 31 March 2005

• Confident in our original tax treatment and no provision has been raised

• Current transactions to be unwound in 2H05 as the NZ thin capitalisation regime to apply from 1 July 2005 renders them uneconomic

11

2H05 (est.)

Nil4485

1H06 (forecast)

1H052004Full year

• Revenue impact from the unwinding of these transactions, will impact earnings in 2H05

• Alternate structured transactions have already been undertaken to assist in offsetting loss of revenue

Revenues from NZ Structured Finance Transactions ($m)


Exchange of NZ Class shares

• No impact on EPS or published capital ratios• NZ Class shareholders will receive their final imputed

dividend on 1 July 2005• Improved capital flexibility as NZ Class shares were deemed

‘innovative equity’ and were not classified as Level 1 Tier 1 capital for regulatory purposes

The impact

• NZ Class shares held on 11 July 2005 will be exchanged for Westpac ordinary shares on a 1 for 1 basis

• A New Zealand register will be established to enable ordinary shares to be traded on NZX

What changes

• Australian tax rule changes enabled Westpac to invoke an exchange of the NZ Class shares

• Efforts to restructure NZ Class shares could not satisfactorily resolve all issues

• Board decided to exercise its right to exchange

What occurred


A balanced, high quality result

• Diverse sources of growth maintaining earnings quality

• True to form on managing growth/margin mix

• Ongoing efficiency improvements adding value

• Risks managed effectively

• Higher dividend reflecting

- Quality and strength of result

- Confidence in future

Outlook

5 May 2005

David Morgan Chief Executive Officer


Environment more challenging

• Economic- Slower domestic demand and credit growth

- Higher interest rate environment

• Regulatory- Numerous regulatory changes under way (Basel II, IFRS,

Sarbanes Oxley, Anti Money Laundering)

- Increased regulatory oversight

• Competitive intensity increasing- Existing players focusing more on market share

- New entrants with price based propositions

- Regional banks venturing outside core markets


Credit growth expected to ease

-8

-4

0

4

8

12

16

20

24

Sep-90 Sep-92 Sep-94 Sep-96 Sep-98 Sep-00 Sep-02 Sep-04 Sep-06

-8

-4

0

4

8

12

16

20

24

Housing Business Total (Aust)

Total credit average Total Housing average

Forecasts (To Sep 2006)

Source: RBA, Westpac

Australian credit growth (%)


Upside potential remains across the business

• Deepen the share of wallet

• Continued growth in business banking

• Build on momentum in deposits and cards

New Zealand

• Strategic initiatives to support expense managementBTSS

• Grow alternative funds under management

• Cross sell opportunities from strong client and product positioningWIB

• Capitalise on sustained improvement in fund performance

• Increase penetration of Westpac customer base

BTFG

• Potential from revamped deposit suite

• Full roll-out of CRM capability

• Improve sales productivity

BCB


David MorganChief Executive Officer

Rob CoombeChief Executive Officer

BT Financial Group

Phil CoffeyGroup Executive Institutional Bank

Michael CoomerGroup Executive

Business & Technology Solutions & Services

Philip ChronicanChief Financial Officer

Ann SherryGroup Executive

Westpac New Zealand & Pacific

Mike Pratt Group Executive

Business & Consumer Banking

Ilana AtlasGroup Executive

People and Performance

Experienced executive team


Westpac well positioned for future

• Long term strategy has increased the resilience of the organisation

• Strategy has delivered:

- Right business mix

- Right financial and capital structure

- Right team

- Right culture

• Accordingly, well positioned for the evolving competitive environment


A balanced, high quality result

• Earnings momentum maintained in lower growth environment

• Growth/margin mix managed well

• Efficiency improved despite compliance spend

• Higher dividend with stronger capital position

• Consistency in long-run growth and returns

0

1,000

2,000

3,000

4,000

5,000

1H00

1H01

1H02

1H03

1H04

1H05

Revenue 8%

Expenses 4%

Core earnings 12%

Revenue and expense performance ($m)

5 Year CAGR 1

1. Underlying basis (excl. significant items but not adjusted for acquisitions and disposals)

2. Excluding goodwill amortisation

2


Positive outlook for Westpac

• Well positioned for the more challenging environment

• Good earnings momentum across all businesses

• Earnings model continues to deliver solid results in changing environment

• Credit quality continues to be favourable

• Continue to deliver strong results at the upper end of the major bank sector

2005 First Half Results

5 May 2005


Bad debt trend analysis – half year trend

10

17

27

39

26

21

32

2429

34

22

05

1015202530354045

1H00

2000

1H01

2001

1H02

2H02

1H03

2H03

1H04

2H04

1H05

Long run expectation 25-35 basis points

Total bad & doubtful debt charge to average loans and acceptances (basis points)


Disclaimer

The material contained in this presentation is intended to be general background information on Westpac Banking Corporation and its activities.

The information is supplied in summary form and is therefore notnecessarily complete. Also, it is not intended that it be relied upon as advice to investors or potential investors, who should consider seeking independent professional advice depending upon their specific investment objectives, financial situation or particular needs.

The financial information contained in this presentation includesnon-GAAP financial measures. For a reconciliation of these measures to the most comparable GAAP measure, please refer to full year financial statements filed with the Securities Exchange Commission and Australian Stock Exchange.

Documents

2005 First Half Results 040505 FINAL - Westpac · 3 2005 Interim Results Presentation Title & Date Robust revenue growth in excess of expenses 0 1,000 2,000 3,000 4,000 5,000 1 H0