Westpac Banking Corporation (ASX:WBC) has finalised changes to accounting for its increased technology investment spending announced last month.
Westpac announced the completion of the supplementary review of its accounting approach regarding increased investment spending. This review was announced on 7th September 2015. The update was regarding its plans on increasing its technological investment spending over the coming three years. The bank aims to increase its annual investment spend by 20% to around $1.3bn directed towards service, growth and efficiency initiatives in order to add over one million new customers in the next three years.
From accounting point of view Westpac has decided to directly expense more project costs than the previous years. The bank will adopt an accelerated amortisation method for capitalised software assets that will impact most of its existing assets with a useful life of greater than three years. The bank has also decided on writing off the capitalised cost of regulatory programs.
These changes will result in a reduction of the capitalised software balance of $505 million (pre-tax) reported as an expense in its FY15 statutory results. The amortisation cash earning expense for the full year 2015 is expected to be $570 million. The bank has also announced a further reduction in FY16 cash earnings due to the increased technological spending and an impact of the change in the amortisation technique.
The change in capitalised software will not have any impact on Westpac’s regulatory capital ratios, as capitalised software is already deducted from regulatory capital.
Westpac’s decision to increase its expenditures can be seen as an effort to improve its long-term sustainability while the banking sector in general has seen a slump over the past three months.
On 6 October 2015 WBC was trading at ~$30.35, down 8.2% for the year. Investors have sold off the big four banks this year amid fears of regulatory challenges as well increased pressure on profit margins. As opposed to CBA and ANZ, Westpac has not yet announced a substantial capital raising but may do so during its full year results presentation in November.
Author: Matthew Dibb
Oct 06, 2015
Matthew has an extensive track record in equity markets and derivative advisory. Spanning a career in several investment banks and prviate wealth groups including Macquarie Bank, his specialist knowledge relates to capital market advisory and equity market analytics. Matthew has a diploma in Financial Advisory, Applied Finance and is ADA 1 & 2 accredited.