Westpac First Half Profit Surges 22% to $4B On Steady Interest Margins

Westpac first half profit surges 22 percent to $4B           

Westpac has reported a solid 22 percent lift in Net Profit to $4 billion for the 6 months ended March 2023, up 22 percent on the Bank’s corresponding first half of the 2022 financial year. The Bank’s focus on margin management and cost discipline and little change in the level of stressed assets have contributed to the positive result. The Core Net Interest Margin (NIM), which excludes Treasury and Markets movements, averaged 1.9 percent throughout the first half of 2023, up from 1.8 percent in the prior corresponding period.

Earnings per share at $1.14, is up 26 percent from 91 cents while the interim dividend of 70 cents per share, fully franked, and payable on 27 June, is an increase of 15 percent or 9 cents on first half of the 2022 financial year.

Westpac reduced its expense to income ratio to 45.9 percent during the reporting period, with expenses down 1 percent to $4.99 billion. Revenue was up 7 percent to $10.87 billion. Interestingly Westpac stated that a 12 percent office space reduction was a factor in its cost reduction program.

Total Group loans at 31 March were $754 billion, up from $724 billion or 4.1 percent from March 2022. Sixty-three percent of these loans are mortgage loans.

Westpac finished the half-year with a strengthened balance sheet and funding and liquidity ratios well above regulatory requirements. The Common Equity Tier 1 (CET1) ratio of 12.3 percent is $3.6 billion above the top-end of the Bank’s 11 to 11.5 percent target range, which is also well above the APRA Prudential Standard. In terms of internationally comparable prudential measures, Westpac’s CET1 ratio stands at 18.1 percent, reflecting the quality of Australian banks compared with their global peers generally. The Bank’s strong capital position explains why it isn’t offering a share price discount to DRP participants – in short, it doesn’t need the capital. This move will also limit equity dilution of existing shareholders who accept cash for their dividend.

Liquid assets, as a percentage of total assets, are now 21 percent, while customer deposits currently are 65 percent of total funds, leaving 28 percent comprising wholesale and capital markets funding, and the remaining 7 are percent equity investors.

The Bank noted that its Core NIM peaked in October 2022, although it has held up well since that time given the Bank’s Exit NIM for the month of March 2023 was stable at 1.88 percent. This compares to the March quarter average NIM of 1.9 percent.

Tougher economic outlook          

Boosted credit impairment provisions reflecting the forecast tougher economic outlook has seen a total impairment provision of $4.92 billion, up from $4.63 billion, which is $1.5 billion above Westpac’s base case.

The Bank disclosed a slight increase in early cycle mortgage delinquencies but stated that most mortgage customers are ahead on their repayments.

The Future

Predicated on a slowing future economic growth rate, Westpac expects that the RBA cash rate as at December 2024 will drop to 2.85 percent, a decline of 1 percent based on the December 2023 forecast of 3.85 percent. Westpac is forecasting a peak RBA cash rate of 4.1 percent later this year.

House prices are expected to be flat throughout 2023, before increasing by an average of 5 percent during 2024, according to Westpac.

The Bank expects that headwinds on net interest margins will persist, with system credit growth easing in the year ahead. The Bank also expects the costs of risk management, regulation, wages and overall inflation to remain elevated. However, Westpac considers interest rates are closer to their peak.

Westpac appear well prepared for a slowing economy, although do see more stress in the period ahead, especially in small business. The Bank has the balance sheet for a tougher economic outlook and so are entering the current uncertain economic environment from a position of strength. This should support consistent and steady shareholder returns in the period ahead.