Will markets swallow Westpac's formula?

Investors will be sceptical that Westpac's new growth strategy, expected to be announced with its results, can deliver without increasing costs. But the bank is pinning great hopes on Brian Hartzer.

When Westpac boss Gail Kelly unveils the bank’s full-year results on Thursday, investors will be keenly focused on what she has to say about the bank’s future growth strategy.

Kelly is under mounting pressure to demonstrate that she has a solution for turning around the bank’s weak revenue growth. Westpac’s loan book is heavily skewed towards the Australian retail market, which has been experiencing only sluggish growth in recent years as consumers have cut back on borrowing and boosted their savings.

As a result, Westpac’s core earnings only grew by a meagre 1 per cent in 2011, while the bank’s expenses climbed by 2 per cent. The bank was only able to report a creditable 7 per cent increase in cash earnings to $6.3 billion for the year because of a sharp drop in provisions for bad debts.

Kelly’s solution for boosting the bank’s bottom line is likely to rest heavily on the two areas that achieved strong results in 2011: lending to small-to-medium enterprises and funds management. The bank’s new strategy will be to boost its share of these markets to match its broader 25 per cent share of the Australian market. At the same time, the bank is hoping to lift its share of retail and business deposits from the current levels in the low 20 per cent range.

As a result, Kelly is expected to outline a strategy that will see the banks’ share of small-to-medium lending rise to around 25 per cent (from around 20 per cent at present). Similarly, she wants to see the bank lift its share of the country’s $1.3 trillion superannuation market from around 5 per cent at present to around 15 per cent.

But Kelly’s targets will be met with some scepticism. How, investors will ask, does Kelly plan to meet her ambitious goals? Is she planning to open more branches, or to hire more relationship lenders to work in the branches in the hope of writing more loans to small businesses? Is she planning to boost her share of the superannuation market by hiring more financial planners, or is she instead planning to boost market share by offering discounted fees on super products?

Investors know that the market shares of the big four banks have tended to be extremely stable over time. Unless Kelly unveils some major new initiatives, it will be difficult to convince them that Westpac is serious about its objectives. The trouble is that most major new initiatives cost money – either in terms of increased staff costs, or lower revenues as a result of cutting margins or fees – and investors will be cautious about any new spending initiatives by the bank.

Similarly, investors will also query how Westpac is planning to boost its share of the deposit market. Since the global financial crisis, the major banks have been vying to increase their share of local savings and reduce their reliance on offshore borrowings. Westpac will undoubtedly face a swift and determined response from Commonwealth Bank, NAB and ANZ Bank if it lifts deposit rates in a bid to attract more deposits.

Kelly is likely to counter that her goals can be achieved without significantly increasing the bank’s cost base. She’ll point out that the bank’s Local Strategy is already showing signs of improving productivity in the bank’s 1,000-odd branches by streamlining lending processes. As a result, staff employed in the branches have more time to focus on growth areas, such as writing more business loans and selling more funds management and insurance products.

But critics will argue that all of Westpac’s major competitors are now actively pursuing similar measures to boost productivity in the branches, and that Westpac’s efforts to date have not really differentiated it from its rivals.

Ultimately, Kelly’s strategy hinges on the effectiveness of its latest star recruit, Brian Hartzer, who is set to take charge of Westpac’s entire Australian operations in mid-June. Hartzer, who is understood to endorse the bank’s strategy of lifting its market share in key markets, enjoys a huge reputation in the market as a result of his stints at the ANZ Bank and running the UK retail division of the troubled Royal Bank of Scotland.

Westpac investors, along with Kelly herself, will be hoping that Hartzer will be able to deliver the magical banking formula of increasing revenues while keeping a tight control on costs.