Westpac plays jiggery-pokery with “statutory” profit numbers

For several years I campaigned to get Westpac New Zealand to report its statutory net profit in its results press release rather than simply “cash” profits.

That was unlike the other three Australian-owned banks that dominate the NZ banking system, which all provided the statutory figures.

Even so, those three competitors still tried to persuade everybody – and, unfortunately, largely succeeded – that they should pay more attention to those cash profits, arguing this number was a more accurate gauge of performance.

As Massey University banking professor David Tripe says, the cash figure is a measure that doesn’t have any accounting rules specifying what it must and must not include.

“The cash profits are a number that doesn't conform to any accounting standards,” Tripe says.

Which left those numbers open to being massaged and manipulated to show whatever a bank might have wanted to convey each time it reported.

In general, the banks chose to exclude such items as mark-to-market changes in value of hedging instruments and derivatives from their cash figure.

But I've always argued that hedging and derivatives activities are core banking activities and so it didn't make sense to exclude them.

Unlike the cash figure, the statutory figure has the force of law behind it and rules that banks have to follow to arrive at their numbers.

Eventually, Westpac gave in and started providing the statutory profit figure as well as the cash result.

For thee but not for me

Westpac's parent has to follow those rules when it reports to ASX. But apparently, its NZ subsidiary doesn't think it has to anymore.

The difference is material to the tune of $41 million between what Westpac said was its statutory profit and the number it finally published in its Reserve Bank-mandated disclosure statement.

It reported a $426 million “statutory” net profit for the six months ended March 31, down 33% from the $640 million it reported for the same six months a year earlier.

There is no doubt Westpac was being misleading here; a footnote attached to the $426 million figure said that this was “net profit attributable to owners of Westpac NZ, net profit after tax, or statutory net profit.”

But the true statutory result, as reported in the disclosure statement, was $467 million for the latest six months, which was down only 6% from the $497 million reported for the same six months a year earlier.

To be clear, this is the actual statutory result of Westpac New Zealand Limited (WNZL), the legal entity that the RBNZ regulates.

To be sure, Westpac's press release did include a figure of $467 million, but it described this as the “net profit of WNZL Banking Group.” That's not the legal name of the subsidiary.

And the note attached to this number didn't include the word “statutory.”

There is no way a reasonable person could have realised this was the real statutory result, especially when the $426 figure was the one labelled “statutory.”

Different branch numbers

Westpac also has a branch registered in NZ and it also has to publish a separate disclosure statement, but the numbers reported in that statement are different again: it made a first-half net profit of $526 million, down 22.6% from the $678 million reported for the same six months a year earlier.

The branch includes wholesale banking and the group's insurance and wealth management activities – Westpac owns BT Funds Management – as well as the WNZL results.

When I discovered the discrepancy in the numbers, I asked Westpac for an explanation.

“In summary… they each include different cross sections of entities because the RBNZ and Westpac Banking Group in Australia require different things,” the bank explained.

“Originally, you were looking at the 426 number in the summary financials quoted in the press release. This number is the management reporting view we provide to group (this one is not based on legal entities, from what I understand it’s more of a convenience number for them).”

For the record, this is a departure from Westpac's previous practice. In its presss release on the result for the year ended September last year, the number the bank labelled as “statutory” matched what was reported in the disclosure statement.

Playing down profits

If Westpac is going to play silly games like this, it leaves itself open to people putting the worst possible construction on this misleading behaviour.

Now, this looks very much like a bank wanting to play down how profitable it is – who would've thought!

Especially at a time when the government was known to be mulling charging the Commerce Commission with the task of investigating whether competition is working in the banking sector.

Newspaper and website headlines show what a hot potato bank profits have been through covid.

In March, the NZ Herald ran a story that began: “New Zealand's banks made a record $7.18 billion in 2022 - a net profit after tax that was a billion dollars higher than the year before.”

Ahead of the government actually announcing that ComCom investigation on June 20, Stuff ran a story headlined: “Big NZ banks making profits of $300-per-second.”

Finance minister Grant Robertson said in the statement announcing the investigation that “Kiwis need to know they can trust their bank with their finances.”

That's a statement that suggests Kiwis can't trust their banks, a bit of a “when did you stop beating your wife” type of statement. Unfortunately, behaviour such as Westpac's does the opposite of dispelling such concerns.

Not working well

“The cost-of-living is top of mind for many Kiwis and we need to ensure there’s a competitive market among banks providing personal loans, mortgages, credit cards and other banking services so that people have confidence they are getting the best deal possible when doing their banking,” Robertson said.

“There have been long-standing concerns that the market is not working well for New Zealanders. Banks have consistently made high profits over a number of years and their returns have outperformed their peers in other countries.”

Earlier this month, the ComCom echoed such political talking points in a preliminary issues paper.

NZ banks are widely regarded as financially strong and stable, “but indications of persistently high profitability raise questions about the intensity of competition, including for personal banking services,” the paper said.

It pointed to RBNZ data, which showed that the big banks had a five-year average return on equity (ROE) that was more than twice that of the smaller banks and was also above all peer countries apart from Canada.

I stumbled across the Westpac discrepancy while looking for a way of illustrating the impact on the bank's profits of the $1 billion of additional capital it was forced to hold after it fessed up to failing to get RBNZ approval for nearly half the internal models Westpac was using to calculate its capital position.

Dashboard numbers

By then I realised I didn't need to trawl through Westpac's disclosure statements – the RBNZ's bank financial strength dashboard has already done the hard work.

Sure enough, whether it was that extra $1 billion of capital or some other reason, Westpac was the least profitable, or had the lowest ROE, in 12 of the 16 quarters in calendar years 2018 to 2021.

This was particularly pronounced in the March quarter of 2020 when covid first hit. Westpac's ROE was just 3.4% compared with BNZ's 6.2% and ASB and ANZ both on 10.5%. Its best quarter through that period ws the March quarter of 2019 when its ROE was 14.6%, ahead of ANZ's 14.4% but behind BNZ's at 16.15 and ASB's at 16.8%.

So, Westpac can credibly argue that it's less profitable than its peers, if that was the message it was trying to convey.

But one last irony: after years of asserting the cash profit was the number to watch that more fairly represented the bank's performance, Westpac has evidently had a change of heart.

Another piece of fine print in the latest results said: “Net profit is now the single measure Westpac Group and Westpac NZ use to assess overall financial performance. Westpac Group and Westpac NZ no longer report cash earnings.”

Note: I had originally planned to start charging for Just the Business after the first four weeks. However, since the free subscriber numbers keep climbing pleasingly, I've decided to keep it free for longer. So, if you know anybody likely to be interested in reading my work, please forward this email to them.