Westpac to scrap outdated computer systems

Company News

by Glenn Dyer

Westpac (ASX:WBC) has revealed ambitious plans to get rid of outdated and slow computer systems, software and other technology over the next four years that will have an estimated cost close to $10 billion between now and 2028.

The bank’s CEO, Peter King and chief information officer, Scott Collary revealed the plans in a presentation released on Wednesday that it is hoped will bring the company's brands onto a single platform.

To sell the massive plan, Westpac did pre-release briefings of business media and reports, which appeared in print and on line before yesterday’s announcement.

But it gave a preview in the 2023 annual report when it said: "In coming years we will continue our simplification by integrating technology to deal with complexity, cost and service issues from past acquisitions.

"We believe this will improve service for customers, grow our business in line with system, deliver a cost to income ratio closer to peers and remove legacy systems and duplication. It will lay the foundations for the Westpac of the future.

"Over the past four years, we’ve had an annual average investment spend of approximately $2 billion. Including technology simplification, we anticipate future annual total investment of a similar level.”

The estimate is not much different to the forecasts yesterday, so there shouldn't be too much whining from analysts (but there will be -- they always put profits and share prices ahead of these issues).

The bank will turn off 120 systems under its new Unite strategy, which is aimed at cutting down risks and costs that had hamstrung the bank for 15 years since its acquisition of St George at the height of the global financial crisis.

The bank aims to have completed the revamp by 2027-28 and says it is not dependant on the current executive team remaining in place to oversee the upgrades.

Westpac made it clear that its technology simplification will come at a significant cost, with the total investment spend is expected to be about $1.8 billion in the 2024 financial year (ending September 30) and then around $2 billion annually from 2025 to 2028. That's a total spend of around $9.8 billion.

Westpac believes it will be well worth the investment and says the Unite plan will help close the cost to income ratio gap to peers. It also expects run cost efficiency benefits and a reduction in the cost of change.

In the year to last September, Westpac’s cost to income ratio fell (a good thing) to just over 49 per cent from 55.1 per cent in the previous year. That means 49 cents in every dollar of income was costs -- which is what the bank wants to drive down with the technology revamp.

The ratio is also driven by revenue growth. In a strong year when revenues rise quickly, the ratio falls; when it's a slow year, it rises. This is unless costs are cut at the same time, which is always a hard thing for a company to do.

Westpac lifted net income (revenue) by 10 per cent in 2022-23 to just over $21 billion, which helps explain why the cost to income ratio fell.

In its interim report for the December, 2023 half year, the Commonwealth Bank (ASX:CBA) reported a cost to income ratio of 44 per cent up from 42.4 per cent a year earlier. No growth in revenue for the half (which totalled $13.65 billion) helps explain the small rise.

The CBA’s low ratio is obviously what Westpac is aiming to match eventually.

The cost to income ratio (and of course the bank’s net interest margin) will be two of the data points to be closely watched over time to see how the tech revamp is travelling. But one other data point will be employee numbers. Westpac has around 36,000 employees.

The easiest way to make this revamp look great will be to shed employees over the next five years.

That won’t quite be the real story because the bank could have done that and not spent heavily on new technology.

And if Westpac’s plan runs into trouble -- such as cost overruns and delays -- listen out for the moans from analysts and some big shareholders in this vein.

Westpac shares eased by just over 1 per cent on the confirmation of the plan and five-year cost, a fall that was not unexpected.

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