Westpac lifts half-yearly cash earnings to $3.9b

Rod Myer
May 02, 2016, updated May 02, 2016

Westpac Banking Corp has posted a three per cent lift in its half-year cash earnings to $3.904 billion.

Statutory profit for the period is up three per cent at $3.7 billion. The fully franked interim dividend of 94 cents, is up from 93 cents.

The share market didn’t like the result, pushing Westpac shares down $1.24 or 4 per cent to $29.80.

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Chief executive Brian Hartzer called it a sound result in a “volatile economic environment”, following tightened regulatory measures imposed on banks in 2015.

But the bank reported more bad loans in its institutional lending arm.

The result is slightly weaker than the market tipped and Westpac said its business lending arm suffered “significantly higher” impairment charges with four major customers adding $252 million to its bad debt charge.

Those firms are believed to be failed steelmaker Arrium, bankrupt miner Peabody Energy, law firm Slater & Gordon and transport company McAleese according to UBS analysts.

Despite the riising bad debts The bank boosted the interim dividend by one cent to 94c a share, analysts predicted a profit of about $4 billion and a 94c interim dividend.

In a statement, chief executive Brian Hartzer said the bank had “recorded sound balance sheet growth” and would continue to “focus on controlling costs and delivering sustainable returns”.

While cash earnings rose 3 per cent year on year, profits were down 3 per cent on the September half.

Bad debt problems emerge

Bad debt charges are emerging as a key issue for the banking sector with Westpac’s rose by $326 million, a 96 per cent increase on the previous period a year ago.

Despite this Mr Hartzer said credit quality remained “sound,” and the number of “stressed” exposures had increased only slightly over the second half.

“There have been a few pockets of stress, mostly related to lower commodity prices, and an increase in provisions for a small number of larger exposures, which contributed to a rise in impairment charges,” Mr Hartzer said.

UBS analyst Jonathan Mott said it was a “soft result,” and the “only highlight” came from wider net interest margins, which measure the difference between bank funding costs and what they charge for loans.

Fairfax reported that Macquarie analyst Victor German said the charges for bad loans were higher than expected and Westpac’s share price was likely to underperform after the result.

Stressed exposures as a percentage of total loans rose to 1.03 per cent, a four basis point increase, which Westpac said mainly reflected higher consumer loan delinquencies, especially in mining areas.

Mr Hartzer’s comments on the outlook for credit quality were also relatively upbeat, saying the bank thought asset quality would “remain sound overall.”

“While there have been a small number of large firms experiencing difficulties during the first half, these have been predominantly due to company specific issues that have been, in some cases, exacerbated by the mining cycle,” he said.

“We expect some increase in consumer delinquencies over the second half, but this is likely to be concentrated in segments and sectors that are more reliant on the resources industry.”

Its consumer banking arm powered the result, posting a 5 per cent lift in earnings, to $1.44 billion.

Net interest income was up 10 per cent to $7.6 billion, and the bank’s net interest margin expanded by 9 basis points, to 2.14 per cent.

Banks have faced tougher capital rules in the past year, resulting in moves to raise equity from shareholders. This resulted un a fall in return on equity of 166 basis points to 14.2 per cent, lower than the bank’s 15 per cent return on equity target.

Mr Hartzer was positive on the economy claiming a transition to a “more services-based economy” was under way.

“While the higher than expected Australian dollar represents some risks on the export front, other aspects of the Australian economy are encouraging. The recent firming of commodity prices, solid employment growth – particularly in the services sectors – and ongoing low interest rates all support that outlook,” he said.

Mr Hartzer said the key threats to the outlook came from overseas, which resulting in “fragility” in areas more dependent on mining construction. He also pointed to signs of slowing investment in housing.

– with AAP

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