Shared from the 11/2/2021 Financial Review eEdition

Westpac can fund the energy shift, says King

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CEO Peter King says sustainable finance can still be a growth driver despite pulling back to Australia. PHOTO: DOMINIC LORRIMER

Westpac chief executive Peter King said its struggling institutional bank still has capacity to fund the decarbonisation of the economy and its retreat from Asia will not concede opportunities to ANZ.

With financing the global energy transition a focus at COP26 in Glasgow, Mr King said Westpac – which was building leading carbon trading capabilities across the region a decade ago but had to retreat when the market did not grow as quickly as expected – remained keen to lend into the transition to low carbon energy.

He backed the loss-making institutional bank – which serves large corporations and was dragged into the red by big write-downs as it curbed lending in Asia – saying its green credentials included $1.9 billion of new lending to ‘‘climate change solutions’’.

Westpac aims for this to grow to $3.5 billion by 2023, and to $15 billion by 2030. The presentation slides showed 79 per cent of its lending for electricity generation, or $3.49 billion, is to renewable energy companies, compared with 13.2 per cent for gas and 5 per cent for coal.

‘‘We are already there. We are lending, we have targets, and we are building. We have a good capability,’’ Mr King said.

But analysts questioned whether Westpac’s Asian retreat, and a ‘‘simplification’’ strategy to focus primarily on Australian and New Zealand mortgages, have reduced its capability and could see it miss opportunities to finance the transition.

ANZ said last week it wanted to capture a large part of the project financing the energy transition will require, and targeted renewables lending of $50 billion by 2025 – a larger aspiration than Westpac.

While ANZ has retreated from retail banking in Asia over several years, it decided to maintain an extensive institutional bank that still operates in 33 jurisdictions, servicing large corporates and projects. ANZ CEO Shayne Elliott said last week this reach would allow it to take advantage of the next global super cycle.

In contrast, Westpac has closed two of its Asian offices during this year, with a further three exits under way, as it consolidates its desks into Singapore. It has also closed its energy trading desk, which had traded electricity derivatives.

Analysts were unimpressed. ‘‘You used to have the best institutional franchise on the street, but you’ve spent the last five years shrinking it and de-risking it – and that may have happened at a time when we will move capital into institutional, with rates going higher and what we need to do in climate change,’’ Matthew Wilson, of Evans & Partners, said during the earnings call.

‘‘Trillions of dollars of capital need to be spent there. But your institutional franchise doesn’t look like it is positioned to capture the benefits from it.’’

Mr King rejected this, pointing to Westpac’s participation in ‘‘sustainable finance’’, its large balance sheet – about $63 billion of loans – and a geographic footprint that extends to New Zealand, Singapore, London and New York.

‘‘Our footprint will support our aspirations in climate,’’ Mr King said.

‘‘Our focus will be domestic: Australia and New Zealand will be our focus and helping customers to transition.’’

With energy chiefs such as Santos’ Kevin Gallagher suggesting one of the most important outcomes for COP26 this week will be finalising carbon market trading rules – under Article 6 of the Paris Agreement, Mr King said Westpac has been a long-time supporter of putting a price on carbon.

‘‘I don’t know how that will flow out given developments, but certainly, we do support a price on carbon,’’ he said. Westpac participated in 33 sustainable funding transactions over the year. ‘‘We don’t talk about it a lot, but we have a good capability there and one we can certainly build on,’’ he said.

‘‘We invested heavily in some of the Asian locations over the last four to five years, and that didn’t pay off for us, so we are coming back to Australia.

‘‘But I feel pretty good about the domestic capability of our institutional book.

‘‘The challenge for the WIB book has been reshaping to get us back to a simpler geographic presence, but I am very confident on the outlook.’’

The cash earnings of the institutional bank declined from a $185 million profit in the previous second half to a loss of $900 million in this latest half, due to $965 million in notable items including the write-down of goodwill as it retreated from Asia.

There were also $59 million in additional risk, compliance and legal costs, and a $146 million loss relating to one individual borrower it identified as Forum Finance.

Overall, institutional banking revenue fell by 7 per cent to $1.1 billion, while the net interest margin contracted by 3 basis points to 1.23 per cent.

In contrast, ANZ last week pointed to tailwinds for its institutional bank, including customers borrowing for digitisation, M&A and restructuring supply chains.

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