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Morningstar | Westpac Applies Radical Surgery to its Financial Advice Business. FVE AUD 33 Unchanged

Wide-moat Westpac Banking Corporation surprised with a radical restructure of its wealth business, BT Financial Group. The key change is the withdrawal of providing personal financial advice by Westpac salaried financial advisors and authorised representatives. Westpac will retain its insurance, platform, private wealth and superannuation businesses. It is all about simplifying the business, reducing operating and compliance risk and focusing on profitable wealth businesses where Westpac has natural competitive advantages, such as platforms and insurance. Westpac will be exiting the small loss-making financial advice business in attempt to maximise customer and shareholder value.

The financial impact on Westpac is not material with the restructure removing approximately AUD 53 million in annual aftertax losses, offset by approximately AUD 250-300 million in one off pretax restructuring costs. Restructuring costs of about AUD 200 million will be incurred in first half fiscal 2019 with the remainder split between second half fiscal 2019 and fiscal 2020. The restructure will be modestly EPS accretive in fiscal 2020, excluding remediation costs. Management intends to include all costs in cash earnings. The financial and business impact on Westpac is immaterial, excluding the one-off restructuring costs and there is no change to our AUD 33 fair value estimate. Currently the stock is undervalued trading 20% below our valuation.

Westpac is now not accepting new advice customers for its salaried advisors but will continue supporting existing customers until deal completion, expected June 30, 2019. Westpac will cease offering face to face personal financial advice on all licenses by Sept. 30, 2019. Personal financial advice customers will be referred to a panel of independent third-party advisors or advisor firms. Westpac will sell the financial advice servicing rights to boutique firm, Viridian Advisory. Viridian was set up by ex BT Financial Group advisors in 2015.

Despite the Royal Commission not recommending the breakup of integrated wealth management businesses, the additional compliance costs, a prohibitive regulatory environment and unrealistic investor expectations has pushed Westpac out of the business of providing personal financial advice, except for the wealthy. Westpac will continue to provide financial advice to high net worth customers though its Private Wealth business.

The majority of Westpac’s successful wealth business is retained. BT Financial Group reported cash NPAT of AUD 645 million in fiscal 2018, AUD 754 million in fiscal 2017 and AUD 868 million in fiscal 2016. Westpac will retain the BT brand but the BT Financial Group business will no longer exist under the new structure. The restructure will see the eventual departure of two long serving highly regarded executives George Frazis and Brad Cooper and removal of approximately 900 staff positions. The insurance business is moving to the Consumer Division and the private wealth, platforms and investments and superannuation businesses are moving to an expanded Business Division.

Approximately 90 Westpac salaried planners and 85 support staff will be offered positions at Viridian, with the expected completion date of June 30, 2019. Some authorised representative advisors may also move to Viridian by Sept. 30, 2019.

We reduce our fiscal 2019 cash earnings forecast to AUD 8.06 billion from our previous forecast of AUD 8.32 billion. Our fully franked dividend forecast for fiscal 2019 of AUD 1.89 per share is broadly in line with our previous forecast. The reduction in fiscal 2019 forecasts includes restructuring costs of AUD 200 million pretax or AUD 140 million aftertax, our estimate of remediation costs of AUD 70 million aftertax and an additional AUD 50 million aftertax loss from the financial advice business as the loss of revenue in fiscal 2019 from the discontinued business is greater than then the reduction in costs.

We make changes to our fiscal 2020 earnings forecasts with a further AUD 35 million in aftertax restructuring costs and increased remediation costs partially offset by the savings AUD 53 million in aftertax losses following the exit from the financial advice business. Additional savings of approximately AUD 20 million aftertax per year are expected from the divisional restructure. Westpac will receive yet to be determined, but probably immaterial sale proceeds from the sale of the financial advice servicing rights to Viridian Advisory, depending on the size of business transitioned. Proceeds will be included in cash earnings in fiscal 2019 and 2020.