Photographer: Jack Atley/Bloomberg

Westpac First-Half Profit Misses Estimates as Bad Debts Rise

  • Loan impairment charges increase to highest in six years
  • Westpac expects bad debt charges to decline in second half

Westpac Banking Corp. first-half profit narrowly missed estimates as charges for soured loans soared to the highest in six years. Shares fell the most in more than a month.

Cash profit, which excludes one-time items, was A$3.9 billion ($3 billion) in the six months ended March 31, compared with A$3.78 billion, a year earlier, the Sydney-based lender said in a statement Monday. That missed the A$4.025 billion average estimate of four analysts surveyed by Bloomberg.

Westpac kicks off Australian bank earnings with the focus on bad debt charges as the turn in the commodities cycle impacts firms from miners to oil explorers leading to collapse of companies including Peabody Energy Corp. and Arrium Ltd. Westpac on Monday reported impairment expenses almost doubled, to firms it didn’t identify, largely due to four stressed corporate loans though the lender expected the measure to decline in the six months to Sept. 30.

“The higher provisioning and flat dividend are not positives,” Alex Apoifis from JPMorgan Chase & Co.’s Australian research sales desk in Sydney said in a note to clients. “The market will need to get further comfort that the provisioning will not increase significantly from here.”

Westpac said it will pay an interim dividend of 94 Australian cents, in line with the 2015 final dividend and compared with 97 Australian cents estimated by analysts surveyed by Bloomberg. Westpac shares fell 4.4 percent to A$29.69, the lowest since April 13, at 10:21 a.m. in Sydney. That took declines for the year to 12 percent compared with a 1.8 percent drop for the benchmark S&P/ASX 200 Index.

Bad Debts

Bad debt charges rose to the highest since the first-half of 2010, according to the bank’s previous filings. They were A$667 million in the six months ended March 31 from A$341 million reported a year earlier, the lender said. Westpac may need to raise provisions for five institutional clients, Chief Financial Officer Peter King said March 24.

While Westpac didn’t identify the firms behind the higher provisions, Sydney-based UBS Group AG analysts led by Jonathan Mott said in a note April 13 that the lender will need to set aside more cash for its estimated A$809 million exposure to Arrium, Peabody, Wiggins Island Coal Export Terminal Pty, transport company McAleese Ltd. and law firm Slater & Gordon Ltd.

“Bad debts are the wild card at the moment for Westpac and its peers,” David Ellis, a Sydney-based analyst at Morningstar Inc., said by phone before the earnings. “Besides some single name exposures, the underlying asset quality for Westpac appears stable. The other positives are lending growth and stable margins.”

Bad debt provisions at Australia’s largest lenders are set to rise to their highest in eight years by 2018, as the chances of defaults in the mining, agricultural and dairy sectors increase, according to a survey by Bloomberg in March.

“On most measures, overall asset quality remains sound, with the level of stressed assets little changed over the half,” Chief Executive Officer Brian Hartzer said in Monday’s statement. “There have been a few pockets of stress, mostly related to lower commodity prices, and an increase in provisions for a small number of larger exposures, which contributed to a rise in impairment charges.”

The net interest margin, the spread between interest the bank earns on loans and its cost of funds, stood at 2.14 percent from 2.11 percent in September. Westpac raised its benchmark variable mortgage rate by 20 basis points in October to offset the cost of holding more regulatory capital.

The lender’s common equity tier 1 capital ratio, a measure of its ability to absorb future losses, stood at 10.5 percent as of March 31, compared with 10.2 percent three months earlier, it said. Australia’s largest lenders raised a record A$20 billion in equity capital last year to meet regulation aimed at bolstering their defenses against a housing downturn. They may need to raise more, with the Australian Prudential Regulation Authority saying last month that capital levels would be clear by the end of the year.

Profits were driven by the retail banking arm, which had a 16 percent increase on the back of home-loan growth. Profit at the lender’s institutional lending arm dropped 21 percent due to higher loan loss provisions and lower interest margins.

Stressed exposures climbed to 1.03 percent of total loans as at March 31, up 4 basis points from the previous six months, Westpac said. Australian mortgages overdue by more than 90 days rose to 0.55 percent from 0.45 percent of total loans six months earlier due in part to rising unemployment in mining regions.

Non-interest income dropped 4 percent due to lower credit card fees and institutional activity, it said. Return on equity fell to 14.15 percent as of March 31 from 15.87 percent six months earlier due to equity raising of A$5.5 billion last year, and compares with Westpac’s target of at least 15 percent.

Australia & New Zealand Banking Group Ltd. reports earnings Tuesday, followed by National Australia Bank Ltd. on Thursday. Commonwealth Bank of Australia, which follows a June year-end compared with September for the other three biggest lenders, updates on its third quarter May 9.

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