WESTPAC WHIFFS IT: Bad loans behind first half profit miss

Striked out. Photo: Dylan Buell/ Getty Images.

Westpac posted a 3% rise in first half cash profit to $3.904 billion, below analyst expectations.

The bank had been expected to post a cash profit of $4.1 billion, up from $3.6 billion, according to Bloomberg consensus estimates.

Bad loans were behind the weaker than expected result. The bank said the “significantly higher impairment charges” related mainly to four large companies which added $252 million to bad debt provisions.

Among the high profile companies Westpac is exposed to are steel maker Arrium, now under administration, and law firm Slater and Gordon, now talking to its lenders.

Westpac Institutional Bank’s cash earnings dropped 20% or $136 million to $517 million, driven by a $201 million increase in impairment charges, a reduction in fund performance fees and lower margins.

Westpac is the first of three banks reporting this week. The banks have been under scrutiny since announcing weak full year results for 2015. And analysts are expecting bad debts to rise on weaker activity in mining and from exposure to several big corporate failures.

Westpac today reported statutory net profit of $3.701 billion, also up 3%.

Revenue was up 5% to $10.473 billion.

Cash earnings per share fell 2% to 118.2 cents and cash return on equity (ROE) was 14.2%, down 166 basis points.

These falls were mainly due to capital raisings of $6 billion over the year.

“While this capital has significantly strengthened the balance sheet, it has come at the cost of returns,” Westpac said in an email to shareholders. “This has led to a reduction in the return on equity and lower earnings per share.”

Despite this the bank kept dividends flowing to shareholders. A fully franked interim dividend of 94 cents was declared, up 1 cent over the 2015 interim dividend and unchanged over the 2015 final dividend.

Net interest margins were 2.09%, up from 2.06% in the same six months a year ago, reflecting an increase in mortgage interest rates, but down from 2.11% for the half year to September.

CEO Westpac Chief Executive Officer Brian Hartzer says the result was sound result in a volatile economic environment with significant regulatory change.

“The quality and value of our franchise continues to grow, with increased customer numbers, deeper customer relationships and strategic technology investments that make it easier for customers to do their banking,” he said.

“At the same time we have continued to focus on controlling costs and delivering sustainable returns.”

The bank said there was a rise in consumer delinquencies mostly from states affected by the slowdown in mining.

Impaired assets was 0.26% of total committed exposures, up 2 basis points over the year.

The first half results in detail:

Hartzer said he remained positive about the outlook for the Australian economy and expected another year of sound growth, with GDP increasing by around 2.8% in the 2016 calendar year.

“Australia’s transition to a more services-based economy is now well underway,” he said.

“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.

“The main threat we see is from global factors, which create fragility in businesses and regions that are more dependent on mining and mining construction. We also see signs of moderating housing investment, although housing fundamentals remain in good shape.”

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