Perhaps no one felt the poor performance as keenly as its chief executive Brian Hartzer, who will miss out on a $4 million bonus on the back of the disappointing results.
Westpac also said it would also tap shareholders for $2.5 billion in equity which “… creates flexibility for changes in capital rules and for potential litigation or regulatory action”.
Hang on … Westpac is raising capital? At the same time as it’s paying dividends? (And, for the record, Westpac isn’t the first – and won’t be the last – bank to do it.)
Isn’t that the same as a shop raising prices by $10 on a pair of shoes, then offering you a $10 discount to buy them?
If I was taking a cash advance on one credit card to pay off another card, well, let’s just say, it’s not something any good financial adviser would suggest.
More simply, if Westpac needs the money, does it make sense to pay a dividend with one hand, and ask for another $2.5 billion with the other, especially given the costs involved?
So what’s going on?
We could only speculate as to the motives and closed-door conversations behind the decision, but my best guess is that it comes down to a simple desire: “Don’t scare the horses”.
Many of the bank’s shareholders have come to rely on that dividend. And even if it’s being cut, Westpac can avoid having to cut more deeply by robbing Peter to pay Paul.
That’s a better option for the bank than potentially losing the confidence of shareholders; a move we can assume might also see the share price fall further.
And there is one clearly legitimate reason – paying a dividend allows the bank to pass on franking credits which would otherwise be unused. That does make shareholders better off – for now.
Maybe the bank’s capital raising is a one-off. Maybe shareholders actually like it this way, even if it’s not in their own long-term self-interest.
However, when looking at their holdings, investors would be wise to remember that a painful dividend cut would have been worse if not for the bank’s capital raising, and that should have implications for how they view the strength of the bank’s underlying business and its balance sheet.
Scott Phillips is the Motley Fool’s chief investment officer.