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Westpac First-Quarter Profit Squeezed on Lending Margin Drop

Westpac Reports A$1.5 Billion First-Quarter Profit
A woman uses a Westpac Banking Corp. automated teller machine (ATM) at Cuba Mall in downtown Wellington, New Zealand. Photographer: Mark Coote/Bloomberg

Westpac Banking Corp., Australia’s second-largest bank, reported first-quarter profit that was lower than a year earlier as rising funding costs squeezed the profitability of its lending. The shares fell.

Unaudited cash earnings in the three months ended Dec. 31 were A$1.5 billion ($1.6 billion), the Sydney-based bank said in a statement. It posted cash earnings of A$1.55 billion a year earlier. Today’s result missed the A$1.6 billion estimate of JPMorgan Chase & Co. analyst Scott Manning in a Jan. 30 note.

Chief Executive Officer Gail Kelly is battling the weakest Australian demand for home loans since 1977 by trimming costs and firing as many as 400 people. To offset funding costs driven higher by Europe’s debt crisis, Kelly last week boosted the bank’s mortgage rate by 10 basis points, a move independent of the central bank, which kept borrowing costs unchanged.

“Things aren’t traveling all that well compared to the other banks” Westpac competes against, said Paul Xiradis, who manages about $12 billion in assets as chief executive officer of Ausbil Dexia Ltd. in Sydney. “We’ve seen costs coming out of the other banks and no doubt Westpac is trying to catch up.”

Westpac shares dropped 3.5 percent to A$20.22 in Sydney trading, the most since Nov. 7, extending the decline in the past year to 17 percent. The benchmark S&P/ASX 200 index fell 1.7 percent.

‘Challenging’ Environment

The fiscal first-quarter result reflected “the more challenging operating environment,” which contributed to a A$200 million drop in markets-related income, Kelly said in today’s statement. This was partially offset by profit on asset sales, Westpac said.

“In aggregate, these volatile items negatively impacted operating income by around A$100 million,” the bank said in today’s statement. Excluding these items, cash earnings for the quarter would have been little changed over the average of the fiscal third and fourth quarters, it said.

Commonwealth Bank of Australia, the nation’s largest bank, said yesterday that profit in the six months ended Dec. 31 climbed 19 percent to A$3.62 billion from a year earlier, helped by fewer soured loans. National Australia Bank Ltd. said Feb. 7 that its cash profit in the three months ended Dec. 31 rose 7.7 percent as it increased lending faster than rivals.

Australia & New Zealand Banking Group Ltd. is due to publish unaudited fiscal first-quarter earnings tomorrow.

Australian banks may eliminate 7,000 jobs in the next two years, seeking to reduce labor costs that account for 58 percent of expenses, UBS AG said last month. ANZ Bank said Feb. 13 that it will eliminate about 1,000 positions by Sept. 30.

Job Cuts

Kelly reduced total Westpac staff numbers by 767 to 37,712 in the year ended Sept. 30, and has signaled that the figure will be lower again in the current fiscal year.

The cost of implementing measures to reduce expenses, including restructuring of the workforce, are still being finalized and are “not expected to exceed A$200 million,” the bank said in today’s statement.

“There is no doubt that we are dealing with a lower growth environment,” Kelly told investors on a call today. “There isn’t a revenue wave to ride.”

Australia’s four-pillar banks, so named for a law that prevents them from buying each other, are managing slower demand for mortgages, which account for about 60 percent of all lending in the nation. Borrowing slumped after the central bank boosted interest rates seven times from October 2009 to November 2010. Policy makers cut the key rate by a quarter percentage point in November and December to 4.25 percent, an unexpectedly held the rate unchanged at this month’s meeting.

Economy ‘Suffering’

“Revenue is a function of what’s happening in the economy and the domestic economy is suffering because of the uncertainty around the world and high dollar, and perhaps not getting too much relief from the” Reserve Bank of Australia, Xiradis said.

Credit to home buyers rose 5.4 percent in December from a year earlier, the smallest annual increase since 1977, when central bank data begins. The gain is also a third of the average monthly pace recorded in the decade to December 2009.

Westpac said today that lending grew 1 percent from Sept. 30 to Dec. 31, while expenses were 2 percent higher than the average for the previous two quarters.

The global and Australian economies are in a “deleveraging phase” and the slower growth trend is expected to continue, Kelly said today.

The bank’s net interest margin, a measure of profitability of its lending, narrowed from the average of the fiscal third and fourth quarters by 10 basis points. The impairment charge for bad debts was around A$300 million, “up modestly” from the average of the previous two quarters, it said.

The bank said it has raised A$10 billion in term funding in the fiscal year to date at an average duration of 4.4 years, including its first-ever covered bond issues in the U.S., Europe and Australia.

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