Biggest Australian Bank Possibly Turns Corner
AFTER several tumultuous years Westpac, the oldest and biggest bank in Australia, appears poised for greater stability.
For one thing, the bank is getting new leadership, bringing in an American as its new managing director. Robert Joss will replace 30-year veteran Frank Conroy, who resigned in December.
Mr. Joss, now a vice chairman of Wells Fargo Bank of San Francisco, says his main mission is to restore public confidence and staff morale. He joins the bank in February.
The reaction in the investment community is mixed. Some analysts are concerned that Joss is not Australian and doesn't have first-hand knowledge of the local corporate lending market. Others say that, with his good track record at Wells Fargo, he can teach Westpac more than it can teach him.
A second factor is a turnaround in earnings. Westpac lost $1.56 billion (Australian; US$1.04 billion) in the year ending Sept. 30, 1992, the first year ever with a recorded loss. Its share price has plummeted 45 percent in the past two financial years from $5 to $2.89. The bank, however, recorded a profit of $104 million in the second half. This was after an multimillion-dollar write-down on the value of shares held by Westpac in competitor ANZ Bank and an unexpected US tax liability of $106 million.
Nine directors have resigned since September. One of them was Australia's richest man, media mogul Kerry Packer, who was recently elected to the board after he invested $500 million. The addition of Mr. Packer, who has a reputation as a ruthless cost-cutter, was seen as a sign of strength. But he and his chief lieutenant Al Dunlap resigned eight days later after a disagreement with the board over the speed and extent of the bank's restructuring. Some in the banking community felt he might remove his inve stment, but he has not done so.
The bank's annual meeting drew 5,000 shareholders, many of them angry, to a Sydney convention center Jan. 19. The eight-hour meeting was the biggest and longest in the company's history and even at that was scheduled to continue Jan. 27.
For the time being, the drama has subsided. Indeed, some observers hold that Westpac actually started turning the corner about a year ago.
"They stopped corporate lending about three years ago except for risk-free situations. The supply of credit from Westpac has dried up," says one banking analyst. If Westpac had continued to go sour, he says, the Reserve Bank of Australia would have stepped in. And it hasn't.
Also, concerns that Mr. Packer would dump his investment have subsided. On Jan. 22 he spent $14 million on two parcels of April call options for Westpac shares, which gives him fence-sitting time. He owns 5 percent of the bank directly and the claim options give him the option to go to 10 percent. The option activity is said to be responsible for Westpac's share price strengthening to $3. Though he is no longer on the board, insiders here say he has not given up his ambitions regarding the bank.
Westpac's reputation is as a solid, conservative retail bank. With 17 percent of the total banking loans in the country, it is viewed as a high-quality franchise here.
Observers say the troubles started in the high-flying 1980s when Westpac, like many United States banks, became overexposed in the commercial-properties market, which collapsed.
"The bank had four subsidiaries that were lending into the same commercial market," says Craig Drummond, a banking analyst with J. B. Were, an investment banking house. "And they didn't know what the others were doing. At the same time, the bank itself was lending vast sums into commercial properties.
"Interest rates were artificially pushed low by the government to insure that Australia didn't have a major recession. Property became very affordable." When the government raised interest rates and the country entered recession, the real estate market collapsed. That meant big losses for banks, including Westpac.
The board's recovery plan, announced at the annual meeting, consists of a 10 to 20 percent reduction in staff positions. A Westpac spokesman says that translates into 4,000 to 6,000 positions within the next two years. The bank also intends to build stronger retail and commercial banking operations in Australia and New Zealand, strengthen its institutional banking activities in key markets, improve problem-asset management, divest itself of underperforming businesses and assets, and trim overhead costs.
"In the short term, the target is to have in place by September this year at least $300 million of annualized cost and revenue improvements," said chairman John Uhrig at the annual meeting.
"They probably moved slowly in recognizing the problem," Mr. Drummond says. "Now is a difficult market to sell assets, so we predict the recovery will be protracted, perhaps over several years."