Westpac Posts Smallest Profit Growth Since 2009 on Margin

Westpac Posts Smallest Profit Growth Since 2009 on Lower Margin
Lending increased 5 percent in the six-month period, more than the 4 percent growth in expenses, Westpac said. Photographer: Ian Waldie/Bloomberg

Westpac Banking Corp., Australia’s second-biggest bank, reported the smallest increase in first-half profit since 2009 as competition to attract deposits squeezed margins.

Cash earnings, which exclude one-time items and some costs, rose less than 1 percent in the six months to March 31 to A$3.20 billion ($3.3 billion) from A$3.17 billion a year earlier, Westpac said today. Net income fell 25 percent to A$2.97 billion, matching analysts’ estimates, as the prior period was boosted by tax benefits from buying St. George Bank.

Europe’s debt crisis has made it more expensive for Australia’s biggest banks to raise funds overseas, squeezing margins as credit demand and home sales dwindle. Westpac Chief Executive Officer Gail Kelly today forecast “modest” increases in lending and further competition for deposits at home, putting further pressure on profitability.

“These banks are fighting for funding, particularly for those deposits, and while that’s happening, their margins are going to be under massive pressure,” said Chris Weston, a dealer at IG Markets in Melbourne. “But expenses look like they’re under control.”

Lending increased 5 percent in the six-month period, more than the 4 percent growth in expenses, Westpac said. The bank’s net interest margin, a measure of lending profitability, fell 4 basis points to 2.17 percent from the year-earlier period, mostly because of higher interest rates paid to depositors.

Higher Shares

Westpac shares today rose 1 percent to A$22.91 at the close in Sydney after the bank’s first-half dividend of 88 cents a share beat the expectation of analysts including David Ellis at Morningstar. The S&P/ASX 200 index fell 0.2 percent.

“The aggressively higher dividend underscores the attractiveness of investing in the major banks,” Ellis, Morningstar’s head of banking research, said in an e-mail.

Even with the smaller margins, Westpac’s net interest income advanced 6 percent as loans and deposits swelled. Non-interest income rose 6 percent on higher trading earnings.

Kelly told reporters she’s attempting to switch Westpac’s focus to “a deposit-raising culture from a lending culture.” The outlook is “challenging and difficult,” she said.

Business and consumers are “cautious” and “low” credit growth will continue, she said. In a presentation to investors, the bank forecast further pressure on margins from higher funding costs in the second half.

‘Lower Demand’

Australia & New Zealand Banking Group Ltd., Australia’s third-largest bank, yesterday reported a larger-than-expected decline in lending profitability in the six months ended March 31 as it paid more for deposits and overseas funds. Foreign income drove a 10 percent increase in earnings. In Australia, there’s “persistently lower demand for credit,” CEO Michael Smith said.

National Australia Bank Ltd., the fourth-largest bank in the country, on April 30 reported a 16 percent decline in net income for the six months ended March 31 as it booked charges to shrink its U.K. business. The bank will report details of its earnings, including lending margins, on May 10.

Sales of new homes in Australia fell in March to a record low, according to the Canberra-based Housing Industry Association. The prices declined in the three months through March, extending the longest losing streak in at least a decade, the Australian Bureau of Statistics said this week.

Australia’s central bank on May 1 cut benchmark borrowing costs by a larger-than-expected 50 basis points to spur economic growth, saying Europe’s debt crisis may shock the market for some time.

Rate Cuts

The crisis is pushing up fundraising costs for Australia’s banks, even as the Reserve Bank of Australia cut benchmark borrowing costs. The divergence is forcing lenders to withhold some of the central bank’s rate reductions to protect lending margins.

National Australia Bank yesterday kept more than a third of the RBA cut, trimming its variable mortgage rate by 32 basis points. Commonwealth Bank of Australia said today it will cut its variable mortgage rate by 40 basis points. Westpac said it plans to announce its rate decision tomorrow.