Westpac Second-Half Profit Rises 5% on Lower Bad-Debt Charge

Westpac Banking Corp., Australia’s second-biggest lender by market value, said second-half cash earnings rose 5 percent to a record as bad-debt charges dropped.

Cash profit, which excludes one-time items, increased to A$3.57 billion ($3.37 billion) in the six months to Sept. 30 from A$3.4 billion a year earlier, the Sydney-based lender said in a statement today. That met the A$3.56 billion median estimate of nine analysts surveyed by Bloomberg. Net income rose to A$3.5 billion from A$3 billion.

Chief Executive Officer Gail Kelly has focused on profitability of lending operations as credit growth in the nation nears the slowest pace on record. Westpac, which charges borrowers the most for mortgages among the largest Australian banks, has ceded market share to competitors in the past year.

“The revenue and margins were weaker than expected,” John Buonaccorsi, a Sydney-based analyst at CIMB Group Holdings Bhd., said by phone. “Home lending is slowly picking up. Westpac is overweight New South Wales state, where the action is now, so they could potentially gain, although the lending recovery is still weak.”

The bank boosted its final dividend to 88 Australian cents a share from 84 cents a year earlier and announced a special dividend of 10 cents a share. That met the median estimate of nine analysts surveyed by Bloomberg for a dividend of 88 cents and a special dividend of 10 cents.

Westpac shares closed 1.2 percent lower at A$34.16 in Sydney, trimming gains for the year to 31 percent. The benchmark S&P/ASX 200 Index fell 0.4 percent today.

Bad Debt

Charges for bad debts in the second half decreased to A$409 million from A$604 million a year earlier, while the charges for the full year were down 30 percent to A$847 million, the lender said.

“Westpac has the second-strongest bad debt provision cover among the Australian banks,” said Buonaccorsi. “This time around they didn’t set aside much for new impairments and wrote back some of the prior-year provisions.”

Cash profit for the 12 months ended Sept. 30 climbed to A$7.1 billion from A$6.6 billion a year earlier, Westpac said. That met the median estimate of A$7.08 billion. Net income rose 14 percent to A$6.82 billion from A$5.97 billion.

Westpac’s Australian Financial Services unit, which includes its retail and business banking operations, posted a 12 percent rise in full-year cash profit, while its institutional bank expanded profit by 11 percent. Westpac is the country’s second-largest mortgage lender behind Commonwealth Bank of Australia.

Credit Demand

“I am encouraged by signs of improved confidence, which we expect to lead to increased lending,” Kelly said on a conference call today. “Over the last 18 months, we have prioritized strength and return. We are tilting a bit more to growth as we go into the 2014 year.”

Outstanding mortgages in the nation were expected to rise 5.5 percent in the coming year, while business lending may increase by 2 percent to 3 percent next year, she said.

Australian mortgages expanded 4.8 percent in the year to September to the highest level since August 2012, while business credit grew 1.1 percent, central bank data show. Westpac’s Australian mortgages climbed 4 percent in the year.

Demand for mortgages is increasing after the central bank dropped rates by 225 basis points since late 2011 to a record 2.5 percent and banks cut mortgage rates to a four-year low. House prices in the eight capital cities climbed an average 7.6 percent in the September quarter from a year earlier, government data showed today.

Cost Cuts

The bank’s cash net-interest margin, a measure of lending profitability, dropped 2 basis points to 2.14 percent in the full year. Deposits climbed 10 percent from a year earlier, out pacing lending growth of 4 percent and increasing its deposit-to-loan ratio to 71.4 percent.

Westpac’s employee count fell to 35,597 from 35,675 a year earlier, the lender said. Australian banks are focusing on cost cuts to maintain profits. The bank on Oct. 18 said it planned to cut about 80 jobs next year as part of its outsourcing drive.

The bank’s expense-to-income ratio was 40.9 percent in the year, compared with 40.8 percent in the previous year, which Westpac said was a sector-low rate.

Australia’s major banks have a cost-to-income ratio of 40–45 percent, which is at the low end of the range of their peers globally, according to the RBA.

Westpac’s core Tier 1 capital ratio, a measure of its ability to absorb future losses, was 9.1 percent under the local regulator’s version of Basel III guidelines, compared with 8.4 percent as of June 30.

Westpac’s results follow record earnings posted by its competitors. Australia & New Zealand Banking Group Ltd. posted Oct. 29 a 13 percent increase in second-half profit, while National Australia Bank Ltd. reported a 16 percent gain Nov. 1. Commonwealth Bank announces first-quarter earnings on Nov. 6.

(Updates with analyst comment on bad debts in eighth paragraph.)
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