Westpac Profit Rises on Institutional Bank; Margins Shrink

  • Cash profit in line with estimates as bad-debt charge declines
  • House price growth to moderate this year, CEO Hartzer says

Westpac Banking Corp.’s first-half profit rose on increased earnings from its institutional bank and a drop in bad-debt charges, even as margins contracted.

Unaudited cash profit, which excludes one-time items, rose 3 percent to A$4.02 billion ($3 billion) in the six months ended March 31, the Sydney-based bank said in a stock exchange filing Monday. That met the A$4.02 billion median estimate of four analysts surveyed by Bloomberg.

Like its domestic rival Australia & New Zealand Banking Group Ltd., Westpac’s net interest margin -- a key measure of lending profitability -- shrank under the pressure of higher funding costs and domestic competition for deposits and loans.

Westpac shares rose 0.2 percent to A$33.92 at 11:55 a.m. in Sydney, and have climbed 9 percent in the past 12 months. The broader financials index has risen 14 percent in the past 12 months, outperforming the benchmark S&P/ASX200 Index’s 10.3 percent gain.

“As with peers, the share price strength defies challenging operating conditions for the industry,” Craig Williams, banking analyst at Citigroup Inc., wrote in a note to clients.

The institutional bank, where trading revenue rose more than 50 percent from a year earlier, was the “standout” division in the half, Chief Executive Officer Brian Hartzer said in the statement. Cash earnings at the consumer bank, Westpac’s biggest business, rose 5 percent from a year earlier, but were down from the previous half.

Lower earnings growth is the “new normal” for Australia’s banks, Ernst & Young’s Oceania banking head Tim Dring said in an emailed comment.

The bank also got a boost from a 26 percent fall in bad debt charges to A$493 million.

In highlights from the earnings report:

* Revenue rose 3% to A$10.77 billion
* Expenses rose 1% 
* Net interest margin fell to 2.07% vs 2.14% from year earlier
* Return-on-equity rose to 14% from 13.4% last March
* Dividend 94 Australian cents

Read a full breakdown of Westpac’s earnings

Westpac last year cut its target for return-on-equity -- a measure of how efficiently it invests shareholders’ funds -- to between 13 percent and 14 percent, citing the need to hold more capital and higher regulatory costs.

Australian banks are still some of the most profitable in the developed world, but face a potential slowdown as the regulator tightens curbs on mortgage lending amid fears of a housing bubble.

House-price growth will “moderate” through 2017 and housing credit growth is expected to slow “a little,” Hartzer said.

The bank has become more cautious about lending for inner-city apartments, and has been “actively monitoring” whether buyers who bought off the plan are able to settle purchases. Settlements have been “slightly slower,” it said.

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