Westpac Banking Corporation - Essay Example

Westpac Banking Corporation Brief Overview Westpac started its career in 1817 as the Bank of New South Wales in Sydney, Australia. Westpac has had its share of ups and downs in its 190-year history. Today, Westpac is a well-established organization that employs more than 27,000 employees in its domestic as well as international operations. Westpac concentrates its activities in Australia, New Zealand, and the Pacific. Westpac is ranked in the top 10 listed companies on the Australian Stock Exchange (ASX) in terms of market capitalization and manages over $300 billion in global assets. ANZ Brief Overview ANZ is one of the largest companies in Australia and New Zealand, and ranks among the top 50 banks in the world. Headquartered in Melbourne, Australia, it is a major international banking and financial services group employing over 30,000 people. ANZ began its operations as the Bank of Australasia in the 1830s. During its evolution, ANZ has transacted (merged and acquired) with dozens of banks to arrive at its current standing. ANZ today is the largest bank in New Zealand with assets over $335 billion. ANZ is a publicly listed company and has a footprint in Australia, New Zealand, Asia, pacific, UK/Europe, India and the USA. Year 2006 marked a golden year for Westpac with profitability surging to $3.6 billion, which is 16% higher than the previous year (ANZ Company Profile). Bank of Queensland Brief Overview Established in 1874, Bank of Queensland is Australia’s fastest-growing retail bank with a network of over 200 branches. It ranks among top 150 listed companies in Australia. In the year 2006, Bank of Queensland reported earnings of $82 million, a 21% increase over the previous year. The earnings surpassed expectations of the management as well as shareholders. Following section compares and contrasts the risk management practices and disclosure issues for the above mentioned organizations. Corporate Governance Framework Corporate governance is the set of processes, customs, policies, laws and institutions affecting the way a corporation is directed, administered, or controlled (Meigs, et al., 1999). Westpac’s approach to corporate governance is based on a set of values and behaviors that ensure transparency and fair dealing, and protect shareholder interests. The Board at Westpac monitors local as well as global developments in best practice corporate governance particularly to analyze their ramifications for Westpac. The Australian Stock Exchange Limited (ASX) listing rules require listed entities like Westpac to furnish a statement in their annual report whereby the company discloses the extent to which it has complied with the 28SASXCGC Best Practice Recommendations for the reporting period, and to justify any variances observed. Westpac believes that it is in full compliance with the 28ASXCGC Best Practice Recommendations. Westpac has formulated its corporate governance policies in line with the corporate governance requirements of the NYSE listing rules. However, there still remains a disparity in terms of offering equity compensation plans. According to the NYSE listing rules, shareholders should be assigned the opportunity to vote on equity-compensation plans. To remedy this, Westpac is seeking shareholder approval for its two new equity-based reward schemes. Westpac Board is selected based on stringent criteria of relevant financial and other skills, experience and expertise to meet the objectives. The Board is accountable to shareholders for its performance and its responsibilities include formulating strategies, succession planning, financial performance, compliant financial reporting and continuous disclosure, risk management, corporate responsibility, etc (Westpac Annual Report, 2006). The Board is categorized into five committees that oversee their respective functions such as audit, risk management, remuneration policies, principles of governance, and corporate responsibility. The Board at ANZ is responsible to shareholders for the governance of the Group and oversees its operations and financial performance. It gives the strategic direction to the organization and monitors operational performance. It also monitors compliance in terms of ethical standards and regulatory requirements. One of the objectives of the Board at ANZ is to be an early adopter of best practice rules and comply before a published law or recommendation takes effect. The Board continually monitors governance developments to align ANZ’s practices with the best practice standards (ANZ Annual Report, 2006). ANZ has equity securities listed on the Australian (ASX), New Zealand (NZX), and New York Stock Exchanges (NYSE) and debt securities listed on these and other international Stock Exchanges. ANZ complies with all the listing requirements of the exchanges both in Australia and overseas. ANZ Board, like Westpac, has its reservations in the composition and selection of the Board. Strict criteria are applied for the selection of Board members. ANZ Board also comprises of five committees overseeing the various functions. Four committees are common between Westpac and ANZ. However, the fifth committee varies in terms of the function. Westpac has a Corporate Responsibility and Sustainability Committee that oversees Westpac’s commitment to operate the business ethically, responsibly, and sustainably. In contrast, ANZ has a technology committee that oversees responsibilities in relation to technology and operations related matters. Corporate governance framework of Bank of Queensland rests on ten fundamental principles. Some of the principles include ethical and responsible decision-making, timely and balanced disclosure, prudent risk management, competitive remuneration, and compliant financial reporting. Disclosure of corporate governance practices in Bank of Queensland is more or less the same as in Westpac and ANZ. There are no marked differences except that Westpac has more thoroughly disclosed its framework. All the three banking organizations have reflected good corporate governance principles such as rights and equitable treatment of shareholders, interests of other stakeholders, integrity and ethical behaviour, and disclosure and transparency. Audit Audit refers to evaluation of an organization. Audits are performed to ascertain the validity and reliability of information, and to provide an assessment of a system’s internal control (Cinnamon, Helweg-Larsen, 2006). Pertinent to these organizations is the financial audit which determines whether financial statements are fairly presented in accordance with the International Financial reporting Standards (IFRS) or Generally Accepted Accounting Principles (GAAP). The Audit Committee of Westpac is responsible for ensuring compliance with applicable financial reporting and related regulatory requirements. The Board at Westpac is committed to three core principles in relation to audit governance; Financial reports present a true and fair view; Accounting methods comply with applicable accounting rules and policies; and External auditor is independent. Westpac Board has a policy of rotation of the external auditor whereby the responsibilities of the lead audit partner and the review audit partner cannot be performed by the same people for longer than five years. Moreover, Westpac ensures that its transactions with the external auditor are at arm’s length so as to avoid any conflicts of interest and maintain integrity of the entire process. To avoid conflicts of interest, further steps are taken. For example, the external auditor is not permitted to carry out activities like preparation of accounting records and financial statements, internal audit services, actuarial services, and appraisal or valuation services etc. External auditor is required to attend the AGM to answer any queries that the shareholders may have. Internal audit at Westpac is conducted by the Group Assurance division. External audit at Westpac is conducted by Price Waterhouse Coopers. According to the audit report of 2006, no material inconsistencies were found in the financial statements of Westpac. ANZ has adopted a risk-based approach to auditing. The Audit Committee at ANZ ensures that higher risk activities in each business are audited every year. All audits are conducted in conformity with international auditing standards. Internal audit works in collaboration with external audit panel to ensure a comprehensive audit scope. ANZ has also adopted a policy on relations with external auditor whereby the activities related to the external auditor are strictly monitored. ANZ, like Westpac, follows the same policy of retaining the services of the lead audit partner for a five-year term after which the auditor is required to rotate. External audit at ANZ is conducted by KPMG. As per the 2006 audit report, ANZ has complied with all accounting standards and the financial statements produced reflect true and fair view of the organization. Bank of Queensland has a rigorous approach to auditing. Non-audit services provided by the external auditor in 2006 were in compliance with the corporate governance procedures and did not have any impact on the integrity and objectivity of the auditor. External audit at Bank of Queensland is conducted by KPMG. The 2006 audit report of Bank of Queensland mentioned that the financial statements were in full compliance with the accounting standards. Risk Management Risk management is an activity that integrates recognition of risk, risk assessment, developing strategies to manage it, and mitigation of risk using managerial resources (Wikipedia, 2006). Westpac believes that effective risk management is about maintaining a balanced approach to risk and reward. The risk management strategy at Westpac is approved by the Board and implemented by the CEO together with the executive management team (Westpac Annual Report, 2006). Westpac in its annual report has elaborated on the various risk factors that can potentially hinder its progress and affect its future performance and financial condition. Westpac has mentioned that its business is dependent on Australian and New Zealand economies and any change in the state of the economy can bring about changes in the home lending market, prevailing market interest rates, consumer spending, etc. A volatile market can create a wave of losses generated due to adverse changes in interest rates, foreign exchange rates, and commodity and equity prices. Any change in the prevailing regulatory framework can trigger events leading to losses. Moreover, Westpac is vulnerable to competition which is increasing on a global scale due to consolidation in the financial services industry. Last but not the least is operational risk factor which is present in every organization and can have an adverse impact on the revenue due to failed internal practices, processes and systems. Westpac advises the investing public to fully consider all such risks before earmarking funds for Westpac securities. The risks that are highlighted in the report have been categorized into the following: Credit Risk Market Risk Operational Risk Compliance Risk Westpac has not only mentioned the risk factors that affect the organization but also has provided an insight into the risks. For instance, credit risk has been explained as the risk of financial loss arising from a failure on part of a customer or counterparty to meet their financial obligations. Similarly, operational risk has been elaborated as the risk that arises from inadequate or failed internal processes, people, and systems. Certain control techniques have been adopted at Westpac to counter operational risk. These include segregation of duties, delegation of authority, sound project management, and business continuity planning. Market risk is measured by Value at Risk (VaR) in conjunction with scenario analysis and stress testing. Moreover, Westpac has mentioned that additional resources are allocated to manage other types of risks as well. These include: Equity risk Insurance risk Interest rate risk Liquidity risk Reputation risk; and Strategic risk It is ANZ’s belief that the highly leveraged nature of banking organizations necessitates prudent management of risk. ANZ maintains a Risk Committee that oversees principles, policies and strategies for the management of risk. Major inherent risks faced by ANZ can be categorized as below: Credit Risk Market Risk Operational Risk Compliance Risk ANZ has depicted transparency in disclosing the main risks that affect the organization. ANZ has also elaborated on the ways adopted to improve the risk frameworks and capabilities. Risk management disclosure of the Bank of Queensland is more thorough. The main inherent risks disclosed are: Credit Risk Market Risk Liquidity Risk Operational Risk Market risk has further been divided into traded and non-traded risk. Non-traded market risk results due to asset-liability mismatch caused by fluctuations in interest rates. Bank of Queensland uses derivative financial instruments to manage its interest rate exposure. To counter foreign exchange risk, the bank makes use of foreign exchange contracts to hedge potential exchange rate exposures. Operational risk is mitigated through appropriate reporting lines, defined responsibilities, policies and procedures, and an operation risk program which incorporates quarterly risk monitoring (BOQ Annual Report, 2006). Other Issues Liquidity Westpac has a liquidity funding framework that ensures that funding is provided under normal as well as crisis situations. Models have been developed that ensure liquidity under a wide range of market conditions. These models are reviewed every year to check for any inconsistencies. The liquidity risk capital model provides an estimate of liquidity risk capital that is consistent with measurements of credit, market and operational risk. Any expenses related to liquidity management are allocated to the business units. Liquidity is prudently managed by maintaining a funding base that is adequately diversified. ANZ has not mentioned its liquidity management practice in detail. Though it is important for investors and other stakeholders to know what approach to liquidity management is taken in the organization. Liquidity can be a grave concern for a financial services organization since it is of prime concern to creditors and investors. Liquidity risk is managed in Bank of Queensland through a series of detailed policies, including the management of cash flow mismatches, diversification of the funding base, and retention of adequate levels of high quality liquid assets (BOQ Annual Report, 2006). Capital Adequacy Westpac has disclosed its capital adequacy thoroughly in its annual report. Westpac pursues an active capital management strategy that seeks to find the right balance between the interests of shareholders, regulators, and rating agencies. Westpac has disclosed its Tier 1 and Tier 2 capital figures with targets set for the next year. Annual report also contains disclosure in relation to Basel capital accord. Westpac believes that using advanced measurement approaches for risk monitoring is in the best interests of all the stakeholders. In regards to capital adequacy, there is limited disclosure on part of ANZ whereby it is mentioned that ANZ meets the minimum requirement set forth by the Australian Prudential Regulation Authority (APRA). However, there is no mention as to how it is ensured that capital adequacy is maintained in the organization; neither there is information on capital adequacy targets set by ANZ. Bank of Queensland has met the minimum capital adequacy requirements set forth by APRA and has set targets for the next year. Risk Concentrations Credit portfolio is monitored at Westpac to avoid risk concentrations. Risk mitigation techniques are applied to regularly re-balance the portfolio (Westpac Annual Report, 2006). Westpac has provided a detailed disclosure on its asset quality, credit impairment and loan-loss provisions. ANZ considers risk concentrations as an integral part of the risk management framework. At ANZ, Concentration limits are placed for countries, industries and individual customers to minimize the risk of large unexpected credit losses. Bank of Queensland has made a brief mention of risk concentrations in its annual report mainly conveying the point that there is a structured framework to monitor industry concentrations, and counterparty concentrations. Asset quality disclosure of both Bank of Queensland and ANZ is not thorough. In summary, it can be concluded that Westpac has disclosed its risk management practices in a more detailed fashion in its annual report. Bank of Queensland and ANZ have covered the main aspects, however, in terms of details on asset quality and capital adequacy, they lag behind. With regards to disclosure of corporate governance practices and audit frameworks, all the three organizations have been more or less on the same scale of transparency. REFERENCES ANZ Annual Report, 2006. Retrieved on May 7, 2007 from www.anz.com.au Bank of Queensland Annual Report, 2006. Retrieved on May 7, 2007 from www.boq.com.au Cinnamon, R., Helweg-Larsen, B. (2006) How to Understand Business Finance. New Delhi: Kogan Page. Crockford, Neil (1986). An Introduction to Risk Management (2nd ed.). Woodhead-Faulkner. Meigs, R.F., Williams, J.R., Bettner, M.S., & Haka, S.F. (1999).Accounting: The Basis for Business Decisions.11th Ed. New York: Irwin-McGraw Hill. Westpac Annual Report, 2006. Retrieved on May 7, 2007 from www.westpac.com.au Wikipedia (2006). Risk Management. Retrieved on May 8, 2007 from http://en.wikipedia.org/wiki/Risk_management Read More