Westpac to Pay Special Dividend After Cash Profit Rises 10%

Westpac Banking Corp., Australia’s second-biggest lender by market value, will pay a special dividend for the first time since 1988 after first-half cash earnings rose 10 percent as its expense ratio narrowed.

Cash profit, which reflects earnings from continuing operations, climbed to A$3.53 billion ($3.62 billion) in the six months ended March 31, the Sydney-based lender said in a statement. Analysts had estimated earnings on that basis of A$3.47 billion. The special dividend of 10 Australian cents per share will be on top of an interim payout of 86 cents.

Chief Executive Officer Gail Kelly has passed on only a portion of central bank interest-rate cuts to protect margins and relied on trimming costs to maintain profits as loan growth remains close to a record low. Australia & New Zealand Banking Group Ltd. this week also posted higher first-half earnings, driven by expense reductions.

“It was a good decision to increase the dividend,” Brett Le Mesurier, an analyst at Sydney-based stockbroker BBY Ltd., said in a phone interview. “They’re in a stronger capital position. It’s best that they don’t hold onto the money when they’ve got the franking credits.”

Westpac shares dropped 1 percent to $33.56 as of 3:36 p.m. in Sydney. Commonwealth Bank of Australia fell 1.9 percent, while ANZ was up 0.3 percent.

“The recent run up and upcoming ex-dividend date is pushing some to take the profit and exit,” said Evan Lucas, market strategist at Melbourne-based IG Markets Ltd. Westpac will start trading without its dividend on May 13, according to its website.

Capital Strength

While the bank considered a share buyback, Westpac’s surplus of so-called franking credits enabled the majority of its shareholders to gain a greater benefit from the special dividend, Chief Financial Officer Philip Coffey said on a conference call today. Franking credits are prepaid taxes that can be claimed back by Australian investors.

“There’s enough capital strength to justify a small special dividend,” Coffey said.

Common Tier 1 capital, a measure of Westpac’s ability to absorb future losses, rose 100 basis points to 8.7 percent and is above the bank’s preferred range of 8 percent to 8.5 percent, according to the statement. A basis point is 0.01 percentage point.

Raising Dividends

Westpac last paid a special dividend in 1988, when it returned 10 cents-a-share to stockholders, according to the lender. It completed a A$1 billion share buyback in December 2005, data compiled by Bloomberg show.

The lender also boosted its interim dividend by 2 cents per share from the second half of last year.

Net income rose 11 percent to A$3.3 billion from a year earlier. Westpac’s expense to income ratio improved 51 basis points to 40.6 percent from a year earlier. Lending rose 3 percent, spurred by Australian housing loans, while customer deposits surged 12 percent, the bank said.

“There have been some promising signs of improving consumer confidence and conditions in the housing market have firmed,” Westpac said in the statement. “Business confidence and the investment outlook remain subdued.”

The charge for bad debts declined 28 percent to A$438 million, Westpac said. Soured loans have continued to fall for its Australian retail unit, the lender said in a March market update.

‘Increasingly Confident’

Cash return on equity expanded 102 basis points from a year earlier to 16.1 percent.

“The impressive performance supports our positive outlook on Westpac and the major banks,” David Ellis, an analyst at Morningstar Inc., said in a note. “We are increasingly confident in the medium-term outlook and will likely reassess earnings forecasts.”

ANZ Bank, the country’s third-largest lender by market value, on April 30 reported a 10 percent increase in cash profit and increased dividends. National Australia Bank Ltd. reports on May 9. Commonwealth Bank of Australia, the nation’s largest lender, reports third-quarter earnings on May 15.

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