Tony Boyd
Thank you, James. And it’s probably worth reminding the audience that Peter is running a 206 year old bank, as opposed to the 157 year old HSBC. So we have been doing banking here for a lot longer than some other parts of the world. But, Peter, if we just start with the collapse of Silicon Valley Bank and the takeover of Credit Suisse. There were some comments there from Anthony that we’re too focused on the domestic situation here. But how is that flowing through to what you’re seeing, day to day, at Westpac?
Peter King
Good to be here. And I think when you look at these types of events you always think, what can I learn, and then we’ll come back to the macro. But if we look at Silicon Valley Bank, I took three things from it. First, they took a pretty big punt on interest rates and got it wrong in the sense of their liquidity book. Second, they had concentration risk in the markets they were in – the deposits, and particularly the sectors, and I think the third learning actually is in this digital age information is flowing very quickly. And some of it’s good and some it’s not, but it will force market reactions. So they’re sort of the three things and if we translate that back to Australia, for the Australian banks, we have a lot of liquid assets, government liquid assets, but we hedge them back to variable so that’s not an issue that I see in Australia, for the system. Deposits, I think all banks are pretty well diversified across sectors and geographies when I look at particularly the major banks, we’re well diversified. But I think there is an issue about how we deal with the digital age, I think how we deal with information, whether it’s right or wrong, the speed it goes, the speed that you can move money. So that’s the one that’s probably the interesting learning for me.
Credit Suisse, I’d just say it was in businesses historically that were a little bit more edgy. And we certainly saw that in the Global Financial Crisis, if you think about CDS, and asset quality and what not. So if I think about Australian businesses, broadly, we’re all very domestically focused Australia and New Zealand, we’re in businesses that are core banking and that’s always good for stability.
But you stand back, you’re operating in a global market, these markets have been moving around, some of the interest rate moves we’re seeing in 24 hour periods are big. And the market’s really trying to work out the value of businesses. And so that’s the issue we’re dealing with, wholesale markets are a little bit fraught at the moment. But because we’re all well advanced on our funding programmes for this year, we can sit it out. So from the perspective of us at the moment, I think it kind of feels strange to say this, but things are working pretty well domestically for us. We’ve got to be cautious on funding, we’ve got to be ready to go back into the wholesale markets when they’re ready for us but no one is pressured to do that at the moment.
Tony Boyd
We heard the minister this morning talking about how strong our liquidity ratios are in Australia. So I thought it might be useful for the audience to tell us how much liquidity you’re holding, and I believe they’re in government bonds. And also compare it back to before the Global Financial Crisis in 2008/ 2009. Just to give people an idea of how banking has changed because of tougher regulation.
Peter King
Yeah, well, I think John’s up next. And certainly from the GFC, we had improved the level of capital in the system. So for us, you know, when we did the St. George merger, we were talking about four and a half percent common equity tier one. We’re now running at 11. So that gives you a bit of a sense of dimension since 2008. If we look at the liquidity, the second big change out of the GFC was more liquid assets and more duration in your funding base, the LCR and the NSFR. To bring that to life, we held about $45 billion worth of liquidity back in 2008. Today, it’s around $180 billion. So that’s $180 billion on $1.2 trillion of exposure. So a lot more liquidity, that’s all government bonds, basically, federal government bonds so big material moves in liquidity, and that’s all the regulatory change from the GFC.
So you know, APRA and the industry might have a bit of a debate every so often about whether we’re too conservative or not. But when you get into times like this, you want to show that you are conservative, you have a system that’s conservative, and a system that’s trusted and that’s what we’re seeing.
Tony Boyd
And just only, you mentioned the St. George bank takeover, I remember quite well, that after Westpac took that over
Peter King
Merger
Tony Boyd
Yes, it was a Gail Kelly takeover – but after the merger the concentration in commercial property, as I understand in the book was about 16%. And I think there was some subtle nudges from APRA, John Laker at the time, I think it was that this needed to be down about 9%. Could you just talk about that, the Silicon Valley Bank, of course, had incredible concentration of risk in market securities and had to be marked to value then wipe down the capital. So just do you want to just comment on that? And then what areas of concentration of risk Is APRA worried about today?
Peter King
I might leave that to John. But what we’ve done here at Westpac is we’ve reshaped our mortgage portfolio over the last few years. So we’ve got much less in interest only. So we’re down, I think we were up to 50%, we’re down to 15% now. We’ve reshaped it away from investor to owner-occupier. And then we’ve also reduced commercial property. So from the perspective of our organisation, we would have one of the lowest of the majors in terms of commercial property.
Tony Boyd
What would it be at the moment?
Peter King
It’s about 6%. But the commercial property market has changed. So if I look at the industry, I think the majors have about $270 billion of commercial property lending. Overseas branches have $75 billion, so foreign branches, foreign banks, have about $75 billion, and then there’s a big mezzanine layer that’s come into the market, which isn’t with the banking system. So if I think about 2008, the book back then had a little bit more mezzanine in it, that’s now broadly outside of the banking system. So the shape of the exposure in commercial property is different in my mind, it’s actually, we’ve got much lower LVRs than what we would have had back then. So it’s not only size but I think we think about the quality as well.
Tony Boyd
Okay, thank you for that. And perhaps we can talk about mortgages. This whole debate that started with Matt Comyn at the Commonwealth Bank, who told us that basically people are writing mortgages below the cost of capital. Do you know who that is? And what are you doing about?
Peter King
Well it’s the most competitive market I’ve seen in mortgages in my career. And I think the industry is there or thereabouts on prices. So everyone would be seeing very similar economics. But in terms of what’s happening, we’ve just got to look at the market share outcomes at the moment. I won’t name names – we’re playing in the market but we’re not growing above the market. In fact, we’re growing a little bit less. I think as one of the previous speakers said, the amount of churn in this market refinancing, you have to play because if you don’t your book will shrink very quickly, in terms of the activity in the market. So it’s a market dynamic. It is one that is very good for the customer at the moment. And we’ll see where it goes in the future.
Tony Boyd
And so anyone who’s growing their mortgage book above the market, is that a sort of red warning sign about that institution or how they’re managing risk?
Peter King
No, I think, Anna said it before, so interest rates have gone up on mortgages quite a bit. As the cost of money has gone up, we then add a 3% buffer. So from a credit perspective, at the moment, it’s actually a good time to write business because you’ve got big buffers, property prices have come down, hopefully they won’t come down much further but the security backed is good, the cash flows, so it’s a good time to write business. The question we’ve got is, is the return right for that risk. And that’s one the industry will sort out with the competition over time.
Tony Boyd
And just what’s your cashback at the moment, and how does that sort of work?
Peter King
It’s about three and a half in Westpac but that’s part of the market. Some are four, some below-the-line are six, it’s what happens in the advertised rates and what’s happening individually negotiated.
Tony Boyd
Anna Bligh I think gave quite a robust defence there of why the bank levy shouldn’t go up. What’s your perspective? I mean, it was just a budget repair situation wasn’t it. Do you see it as levelling the playing field?
Peter King
To dimension it for you, we’ve paid $2 billion broadly in the bank levy as Westpac so it’s a big number, over the period it’s been in. It was to repair the budget. In terms of levelling the playing field, wholesale funding is about access and cost, at the moment, wholesale funding is much more expensive than deposits. And so, you know, the couple of basis points is not really going to change the competitive landscape. It’s all about deposits. 84% of our loans are funded by deposits now, that’s up a lot from the GFC. But the bank levy itself isn’t doing a lot for competition.
Tony Boyd
And just on competition, I mean, we will hear from the ACCC chair this morning, but I just wondered if you could comment on regional banks have put the case that they’re not in favour of ANZ Bank buying Suncorp Bank. What’s your perspective? They say they’re not as competitive because they have higher risk weighting, they can’t get the advanced accreditation, for credit risk. What’s your perspective?
Peter King
I think we want a system, I’ll just come back to the risk weights. We want a system that’s well capitalised. If you have the ability to invest to get advanced, and you can prove to the regulator that you’re advanced, if not, you have standards so it’s a choice about investments, the amount of investment you want to put into the model. On ANZ, I’ll leave that to the ACCC. But I’d say from a competitive perspective, if it goes through, these mergers are really hard and we’ll be competing hard to win customers who get upset.
Tony Boyd
That’s sounds good, but if it does go through, do you see it as a green light for the takeover of Bendigo and Adelaide Bank or Bank of Queensland?
Peter King
By whom? I think banking is a scale business now. If you think about the cost of investment in digital technology to compete with the customer, cyber to protect your data and your customer, AML CTF, banking regulation, running the bank, you need scale. Now to me, I think scale will happen. We will see more banks, small banks, small mutuals get together, because you’ve got to spread the big fixed costs of being a regulated ADI across all its aspects and across customers. So I think that’s, you know, if you look out 10 years, it’ll be scale that we’re talking about, the fact that we may have less small players in the industry. But that’s just a consequence of what the industry is being asked to do. And you’ve got to scale up over a lot of customers.
Tony Boyd
Very good. I thought, we said we’d discuss the economy. What’s your perspective? Are we going to escape the recessions? Do you think the RBA should pause in April? Where’s the economy headed from your perspective?
Peter King
So our economics team believe one more rate rise – so one more to go. We’re spending a lot more time now on not so much ‘where’s the peak?’ but for how long do we stay there? So we’re thinking through this cycle. And why that’s important is, how long are customers going to need, for those that need help, how long are they going to be experiencing peak interest rates if you like, so the duration is where we’re thinking a lot about now, because customers will do everything they can pull in their belt, do extra hours of work to keep the roof over their house whether they’re renting or they’re a mortgage holder and cut other spending, but the duration I think will have an indication for how many people need help.
So we’re very focused on the duration. The economics team are saying a rate cut in the first quarter of 24 and a couple more later on, so it feels like 2023 is the hard piece that we need to help people through and as we know, the interest rate, we’ve said before, interest rates are a blunt tool. And what we are looking at in our portfolio is who might need help, but it’s not everyone.
The macro statistics for us still look very healthy. Offset balances are still high, paid ahead is still high, delinquencies are still low, admittedly they ticked up a little bit but not, in the big scheme of things not much so you’ve got to find those people that need help. And one of the messages that we say is call us early. I think there’s still a perception that you don’t call the bank if you need help, please call us. There are a lot of options for us to help customers to navigate the period ahead.
Tony Boyd
Well the audience may have noticed the slogan for today developed by the editor in chief is ‘crunch time for banking’. I wonder if you could tell us, when is crunch time for borrowers? Now Anna Bligh mentioned that three month lag between each rate cut and then coming through into your household budget? Do you see it as the critical moment? Is it September? When are we really going to have the cost of living pressures peak?
Peter King
I don’t think there is a month, I think we’re predicting the trend too fast, because it will depend on more customers. Eight out of 10 rate rises broadly have now gone through into the variable book. And that’s two thirds of our book. And so the last two are probably a little bit more important and they’ll come through in the next little while but people have had pay increases, people have had the ability to reduce spending. The fixed rates, what we’ve got to remember is we lend for 25 years, we fix the rate for two years or three years or one year or whatever it was, and then we assume people will go back onto variable plus 3%. So at the time we originated the loan, they had the cash flow to support the higher rates.
Now, the part of the portfolio we’re watching very closely is high debt to income. So they’re the people that borrowed probably at their maximum capacities. If things haven’t played out as they expected, they might need help. So that’s the part of the portfolio where we’ve been having a good look at. And we can see a little bit more delinquency in that part of the portfolio. So it doesn’t matter which product they’re in, whether it’s fixed or variable, that just impacts the time of when the interest rate rises. It’s all about their fundamental situation.
Tony Boyd
And just on that, if you can put it in perspective. How does Australia’s default rate on mortgages compare to other parts of the world?
Peter King
I remember seeing some US investors in the GFC and we said to them, you know, ‘we’ve got 200 properties in possession’. And they said, ‘200,000?’ ‘No no’, I said ‘200’. So, broadly-and we still have about 200 properties in possession right now-the loss rates in mortgages are very low and have been low for the last 20 years.
Tony Boyd
Just changing tack slightly, there’s a couple of big reviews that affect the banking system in a big way. And one is the Reserve Bank of Australia. As you’re watching that review and the government deliberations, do you agree that we should have a sort of specialist monetary, a group of monetary policy specialists, as advisors to the Board to improve the performance and efficiency and operations of the Reserve Bank?
Peter King
The RBA plays a critical role for the country. And interest rates will go up and would have gone up in the last little while no matter who was running the RBA. So I think that’s clear. Now can we have better advisors, advisors to the RBA, more broader? Possibly. But we’ve got the review so let’s wait for that review and see what they come up with. But I think it’s such a critical capability for the country, we need the best people that we can running it with the best corporate structure we can have running it.
Tony Boyd
Now before I open the floor to questions, just on the Michelle Levy review of the financial advice system, you’re not in financial, well sorry you’ve pulled right back from financial advice. Do you have some thoughts on whether Westpac might come back into that? Or is the framework that she’s put, 13 recommendations, make you confident that we’re going to have higher levels of financial literacy and better advice in Australia?
Peter King
Yeah, I think that there’s sort of different parts of the market. So if you think about high net worth, very specialist, broad financial advice, there’s not really an aspiration for us to get back into that market. And so, but that’s the top end, if you like, what’s really missing in the country now is the mass market. So if you think about, one of the things that I hate looking at is customers who have lost money in an investment scam, it’s massive.
And you go what’s happening, and they’re doing their own financial planning, through Google, Facebook and Twitter and they’re getting access to fake investment prospectuses. So that’s what’s driving me nuts. You then get the money going in and it gets out of the country and they’re life changing losses for individuals. And so that’s the passion for me.
It’s about how do we, how do we help people become more financially literate, how do we work with the telcos to stop these texts, how do we work with the social platforms to pull down the dodgy prospectuses, how do we put sand in the wheels to make the money not flow as fast when people are subject to it. So it’s a big system that we need to attack in different ways. But you step back and you go at the heart of it, we’ve got people that are not financially literate enough, we’ve got people taking advantage of them and we’ve got to respond. So I think the financial, where we’ve got with the review I think is good. I think we need to change it so it’s easier, but it needs to solve the problem at the top end of town, the high net worth end of town as well as the mass. It’s really important.
Tony Boyd
Thank you for that. Is there any questions in the audience for Peter? We can bring a microphone to you, there’s one over there at the back of the room. Just if you say who you are and where you’re from.
Question
You made a comment about the important message for your clients about calling you. So if you’re in trouble, call us, there are support options available. And that’s our message as well. But we’re finding it very hard to cut through to those clients who are in real genuine financial distress. So conscious that, you know, no matter what we do to try to promote our offers or service and assistance and, and to encourage engagement, there are some clients who are just going to be too scared or too anxious to actually just pick up the phone and call us. And so I’m just curious if you’ve got any comments about how do you really cut through to those who are genuinely doing it tough for whom that message of just call us, just might not be enough?
Peter King
So a lot of work has gone into the training of our people, whether they be call centres or are in our branch network, to pick up the signals of vulnerability. And that’s not just financial vulnerability, but more broadly as well. So that’s one of the first things we’ve done, is a lot of work. Every time I’m at a forum, or someone from the bank is at a forum we’re out saying please call us. We’ve got to get past the, I think there’s just this picture, this mental picture from the past, if you call the bank, we’re going to take the keys to the house. That’s not, that’s not how it works. I don’t know what the ATO takes but we’re not going to take the keys to the house. So the deal that we’ve had is we build capital, we build liquidity, we keep the economy going when times get tough, and we help people through as best we can. Now that’s not saying we’re going to be able to help everyone get back on their feet because some people have made not good decisions. But we’ve got to get them talking to us as early as they can.
Tony Boyd
There’s another question here in the front, we’ll probably have to make the last one because time’s, we’ve got the flashing red light here. If you want to bring the microphone down the front, thank you.
Question
I have a question about, you mentioned that banking is a scale business and your customers form the scale of those businesses. How important are initiatives like the Consumer Data Right to help you do more efficient and more cost effective business? So bringing down your unit economics on originating loans, finding customers that are in distress, making sure that the information that you have in your customers is as detailed and current as possible across their whole financial world? Do you think that there is enough focus on that particular tool in relation to how an individual household is operating in Australia at the moment? And how important is it to Westpac to make investments in that space?
Peter King
So digital technology plays a massive role in banking. And there are so many different ways that we can serve customers and get information. In particular, in the case of Open Banking, I think I’ve got 9000 customers using it. So right now, it’s not very cost effective. You know, and part of it is because people don’t wake up thinking, I need Open Banking, they wake up thinking how to I grow my business, how do I buy a house, going to go on holidays, how do I pay for it? I need some assurance. And so that is really the need that we’re most focused on.
The credit bureau being expanded to have all debt is probably in my mind a much bigger issue because the information I need to know is, do I have your complete debt picture? And we have most of it. There’s just a bit of it that’s not in the bureau. So short answer is not important at the moment, we’ll see over time but it’s not a great investment at this point.
Tony, can I just say, I know you’re going to wrap up but on behalf of everyone, this I think is your last public appearance?
Tony Boyd
Yes I’m retiring at the end of the week Peter. So I was banking editor in ’92, two years before you started at Westpac.
Peter King
There you go. But on behalf of everyone can I just say thank you, for those of us who have been written about we may not have always loved it, but we’ve always valued your insight, your professionalism and the way that you tackled the big issues, so thank you very much.
Tony Boyd
Thank you and over my time in banking, you’re the sixth CEO of Westpac that I’ve interviewed and that’s the nicest thing that any one of those has said to me.
