Westpac's Operational Risk Capital Relief: A Strategic Catalyst for Shareholder Value?

In October 2025, the Australian Prudential Regulation Authority (APRA) fully removed the $500 million operational risk capital overlay from Westpac, marking the culmination of a multi-year regulatory journey. This decision, following the bank's completion of its Customer Outcomes and Risk Excellence (CORE) program, has significant implications for capital efficiency and earnings potential. With the overlay's removal, Westpac's Common Equity Tier 1 (CET1) capital ratio is projected to rise by 17–18 basis points, while risk-weighted assets (RWA) will contract by $6.25 billionAPRA removes Westpac's $500m capital overlay after risk management overhaul^[1]. For investors, the question remains: does this regulatory relief translate into a sustainable boost for shareholder value?

Capital Efficiency Gains: A Quantifiable Win

The removal of the overlay directly enhances Westpac's capital efficiency. By reducing RWA-a key metric under Basel III-Westpac can allocate capital more effectively to high-return activities. As of Q3 2025, the bank's CET1 ratio stood at 12.3%, well above its target range of 11.0–11.5%Westpac Q3 2025 slides reveal 8% underlying profit growth, strong capital position^[2]. This buffer, now bolstered by the overlay's removal, provides flexibility to absorb economic shocks while maintaining regulatory compliance. Analysts at Morningstar note that the reduction in RWA could improve return on equity (ROE) by lowering the denominator in the ROE calculation, assuming earnings remain stableDid the market overreact to Westpac results?^[3].

Moreover, the bank's cost/income ratio is expected to improve from 50% to 46% by fiscal 2029, driven by cost-saving initiatives under its Unite simplification projectWestpac: Strong Credit Quality Boosts Earnings and More Capital Returns to Shareholders Likely^[4]. This operational efficiency, combined with a leaner capital structure, positions Westpac to generate higher returns per dollar of equity.

Earnings Potential: Mixed Signals Amid Structural Shifts

While the capital relief is a tailwind, Westpac's earnings trajectory remains nuanced. In Q1 2025, underlying profit rose 3% to $1.9 billion compared to the second-half of 2024, driven by strong credit quality and loan growthWestpac: Strong Credit Quality Boosts Earnings and More Capital Returns to Shareholders Likely^[5]. However, Q2 saw a net loss of $1.84 billion, attributed to margin compression and simplification costsWestpac Banking Reports Second Quarter 2025 Earnings^[6]. This volatility underscores the challenges of balancing short-term pain with long-term gains.

Historical data from 2022 to 2025 reveals a broader pattern of earnings challenges. Despite maintaining a consistent profit margin of 20% in 2022Backtest results: Westpac earnings release impact from 2022 to 2025^[14], Westpac experienced a 22% decline in revenue and a 23% drop in net income compared to the previous yearBacktest results: Westpac earnings release impact from 2022 to 2025^[14]. Earnings per share (EPS) also fell from RM0.13 in 2021 to RM0.059 in 2022Backtest results: Westpac earnings release impact from 2022 to 2025^[14]. These trends highlight structural headwinds that persist even as the bank benefits from regulatory relief.

The bank's net interest margin (NIM) has also faced headwinds, declining to 1.94% in Q1 2025Westpac: Strong Credit Quality Boosts Earnings and More Capital Returns to Shareholders Likely^[7]. Yet, Westpac's disciplined approach to credit risk-evidenced by impairment charges of just 7 basis points-suggests resilience in its loan portfolioWestpac Reports $7B Profit Amid Challenges, Boosts Buyback and Dividends^[8]. Analysts project modest annual profit growth of 4.5% over the next five years, fueled by mid-single-digit loan growth and cost disciplineWestpac earnings: Margin improvement expected to hold^[9].

Shareholder Returns: A Dividend-Focused Strategy

With its capital position strengthened, Westpac has signaled confidence in shareholder returns. In 2025, the bank increased its share buyback program by $1 billion and raised full-year dividends by 6% to $1.51 per shareWestpac Reports $7B Profit Amid Challenges, Boosts Buyback and Dividends^[10]. These actions align with its CET1 ratio of 12.5%, which places it in the top quartile globallyWestpac Reports $7B Profit Amid Challenges, Boosts Buyback and Dividends^[11]. However, the bank's cautious stance-evidenced by a 47.5% weighting to downside economic scenarios-reflects prudence in an uncertain macroeconomic environmentWestpac Q3 2025 slides reveal 8% underlying profit growth, strong capital position^[12].

Strategic Implications for Investors

The capital relief is a strategic catalyst, but its impact hinges on Westpac's ability to sustain its risk governance improvements. APRA's recognition of the bank's progress under the CORE program is a vote of confidence, yet the regulator emphasized that Westpac must continue to uphold robust standards as a systemically important institutionAPRA removes Westpac's $500m capital overlay after risk management overhaul^[13]. For investors, the key metrics to monitor are:
1. ROE trends: A rising ROE would confirm that capital efficiency gains are translating into higher returns.
2. RWA dynamics: Sustained reductions in RWA would indicate effective risk management.
3. Dividend sustainability: The bank's ability to maintain or grow dividends amid economic volatility will test its capital resilience.

Conclusion

Westpac's operational risk capital relief is a clear win for capital efficiency, with tangible benefits for its balance sheet and earnings flexibility. However, the path to enhanced shareholder value is not without challenges. While the removal of the overlay provides a tailwind, the bank must navigate margin pressures, economic uncertainties, and the costs of its transformation. For now, the data suggests that Westpac is on a solid trajectory-but investors should remain vigilant, as the true test of this strategic catalyst lies in its long-term execution.