Westpac woos the big boys
Recommendation
In his previous gig, Morgan did an equally good job in dealing with customers further up the food chain - corporates and government. Fees here make retail fees look like microbes and, under his command, Westpac has been topping the charts in territory traditionally that of international investment banks.
Competitive advantage
Multi-million dollar fees are the norm here - many without any need for balance sheet commitment. Even in a product like securitisation, the bank's own infrastructure can be 'rented' to corporate customers for an administration fee. All of the Big Four are doing this but none so well as Westpac.
Morgan is also pinning a great deal of hope on technology to maintain the competitive advantage. He would be encouraged that 10% of new credit card applications were processed online in January. Banks are generally superficially assessed on the prettiness of the front-end (the bit the customer sees) but in terms of shareholder value, it's the back-end (the bit the bank sees) that counts.
For 10 years, buzzwords such as CRM (Customer Relationship Management) and e-procurement applications have promised much and delivered little but these are clearly the key to efficiency gains in this sector. These days with CRM, Westpac can differentiate valuable customers from 'value diluting' customers, noting 20% of customers are still diluters so there's still some spring-cleaning to be done.
Westpac is also at the forefront of capital management objectives, having repurchased $1bn capital during 2000. This implies a focus on existing businesses rather than acquisitions. It is worth noting that, in a year when Westpac's return on capital (ROC) nominally increased 10% from 16.8% to 18.4%, the return has only increased because the capital has decreased and actual dollars earned need not have changed. The moral is that ROC (and EPS for that matter) are not effective performance indicators in isolation.
Banking dilemma
Also, one wonders why some pretty well-paid boffins can't invent 1,000 new uses for capital. Further, the purpose of capital is to provide a buffer against losses and, while these are the banking salad days, bank creditors would only have praised the merits of excess capital during the lending frenzy of the 1980s. It's an interesting dilemma and applicable to all banks, not just Westpac.
The balance sheet looks good and Westpac's third largest customer base is the government sector, the most attractive credit risk in town. Delinquencies are near record lows, implying a solid capacity to accommodate proposed changes to capital adequacy discussed last time.
Fortunately, an Asian merger/alliance drive, always of questionable value, seems to have cooled. But above all, Westpac is doing a good job and David Morgan knows well how to spin a good yarn. With the stock down 4.2% on our issue 74 review (Hold for the Upside - $13.90) continue to HOLD FOR THE UPSIDE.