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Westpac's Strategic Review to Boost Efficiency; Reaffirms ROE Target

Westpac's Strategic Review to Boost Efficiency; Reaffirms ROE Target
Sep 07, 2015 By Simon Herrmann

Australian banking giant Westpac (ASX:WBC) released its strategic review which aims to grow customer numbers and improve depth and duration of existing customer relationships.

One of the key points of Westpac’s strategic update is a 20% increase in annual investments to around $1.3bn. The additional investment spend will be targeted towards services, growth and efficiency initiatives in order to reach the target of adding over one million new customers over the upcoming three years. The bank also aims to increase the number of products per customer.

Within three years Westpac wants to cut its expense to income ratio below 40% and reaffirms its guidance of targeting return on equity (ROE) of 15%.

Chief Executive Officer Brian Hartzer commented on the update: “We are increasing our annual investment by around $200m to $1.3bn directed towards growth, service and efficiency initiatives. This means concentrating our spend on technology, on digital, on simplification as we hone our focus on service. By investing in digital we can use technology to redesign the customer experience, making things simpler, easier and better for our customers and our people.”

Westpac clearly aims to invest in technology in order to boost efficiency which simultaneously is set to reduce the Group’s expense run-rate to 2-3% per year. As economic conditions in Australia are softening, Westpac reacts to new challenges which it calls ‘a transformational change’ for banking. Mr. Hartzer concluded: “We have set ambitious targets and we have a clear roadmap to get there.”

The strategic review comes at a time where banking shares ran out of favour as investors reduced exposure from Australia’s financial institutions. Westpac shares have declined nearly 10% year to date and are down ~15% in the past 12 months. Regulatory changes that require the banks to hold additional capital has caused analysts to revise growth targets downwards which has inevitably put pressure on the stock price. Westpac was forced to raise $2bn in June by selling parts of its interest in BT Investment Management (ASX:BTT) in the form of a fully-underwritten institutional and retail offer.

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Simon Herrmann Author: Simon Herrmann Sep 07, 2015

Simon is a financial analyst at independent research firm Wise-owl who wants to change the world by disrupting the cliché approach to investment decision making with convergent thinking. Wise-owl’s goal is plain and simple: Find the best opportunities for our members by following a proven methodology and to create long-term value through high-quality advice, innovation, technology and education. We combine industry experience and the agile mentality of a start-up. Wise-owl is the future of stock market investing.

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