14 April 2016 Credit Brief Westpac Banking Corporation Little Impact from Rate Manipulation, But Reputation is at Risk Key Credit Highlights • FY9/15’s net profit boosted by one-off gains but downward pressure on margins likely on macro backdrop. Westpac’s net profit grew 6% YoY to c.AUD8.1bn in FY9/15 due to one-off gains from the partial sale of BT Investment Management, tax recoveries and changes in accounting treatment. NIM was flat at 2.08% while loan growth dropped marginally to 7.3% from 8.1% a year ago, in which we expect further slowdown in its lending business should correction of property price materialise as mortgages constitute 66% of Westpac’s loan book. • Sufficient loan loss buffer but lowest among the Big-4. The bank’s CET1 and CAR improved a tad from 9.0% and 12.3% to 9.5% and 13.3% respectively but is the lowest among the top four banks, which averages 9.9% and 13.7%. We do not envisage difficulties for Westpac to replenish its upcoming callable subdebts amounting up to c.USD350m and USD1.6bn in 2016 and 2017 respectively on top of yearly requirement until 2021 if TLAC is implemented. • High quality loan portfolio and prudent loan loss coverage. Westpac’s NPL ratio improved to 0.3% in FY9/15 compared to 0.4% a year ago. We also note Westpac’s persistent increase in loan loss coverage from 95% in FY9/12 to c.160% in FY9/15. • Systemically important but adoption of resolution regime may moderate assumption of government support. Westpac is the second largest bank with c.21% market share of loans and deposits. As such, we opine that the likelihood of government support in the event of financial distress is high. However, this assumption may be lowered if the resolution regime results in creditors bailing-out banks. • Wholesale funding still substantial albeit decreasing. 34% of Westpac operations are financed by wholesale funding. Nonetheless, we observe the drop of wholesale short-term funding from 36% in 2008 to 16.2% in FY9/15 as positive improvement. Besides, its Liquidity Coverage Ratio (LCR) improved to 121% from 103%. • Allegation of rate rigging to have little financial impact. The Australian Securities & Investments Commission (ASIC) has brought Westpac to court on accusation of manipulation of the Bank Bill Swap Rate (BBSW) 16 times between April 2010 and June 2012, which follows after similar action on ANZ on 4 March 2016. If found guilty, Westpac can be fined up to AUD16m, or AUD1m for each contravention of rules which may not severely affect its profitability but potentially detrimental to its reputation.