Westpac profit up 10 per cent

Westpac reported a 10 per cent increase in cash earnings to $3.5 billion in the six months that ended 31 March 2013 (H113).

Capital strength in excess of its preferred range enabled Westpac to declare a 10 cent fully-franked special dividend.

Common equity tier 1 ratio rose from 7.7 per cent in the six months that ended 31 March 2012 (H112) to 8.7 per cent, above the bank’s target range of 8 to 8.5 per cent. Five years ago the ratio was 6 per cent.

Additionally, Westpac will purchase shares to neutralise its dividend reinvestment plan rather than issue shares as it previously did.

Westpac also declared a 4 cent increase in the fully-franked interim dividend to 86 cents for a steady dividend payout ratio.

The balance sheet strengthened with a $170 million drop in impaired charges due to improved asset quality in the mid-to-large corporate portfolio.

Stressed assets to total committed exposures fell from 2.26 per cent in H112 to 1.94 per cent.

All the Australian businesses generated double-digit growth in cash earnings with St George Banking Group’s (which includes Bank of Melbourne, BankSA and RAMS) earnings up 25 per cent to $715 million.

BT Financial Group’s earnings rose 15 per cent to $345 million, those of Westpac Institutional Bank rose 11 per cent to $813 million and Westpac retail and business bank earnings were up 11 per cent to $1.12 billion.

Westpac New Zealand’s earnings lagged, with a 7 per cent increase to NZ$370 million.

Lending was up 3 per cent and deposits rose 14 per cent.

Westpac chief executive officer Gail Kelly said at a press conference on Friday that the New Zealand home loan business was focused on loans with a loan-to-value ratio of below 80 per cent.

Across the group, the net interest margin improved 2 basis points (bp) to 2.19 per cent. 

Customer deposits grew above system, with a 12 per cent increase and fully funded the 3 per cent increase in lending, leading to a 69 per cent deposit to loan ratio, up from 63.2 per cent in H112.

Kelly said there was now a “deposit culture embedded” in the bank. She conceded she would like mortgage growth closer to system growth than the 0.8 per cent of system growth recently experienced.

Kelly drew attention to the increase in the stable funding ratio from 64 per cent in the 2008 financial year to 83 per cent in H113 with the percentage of funding from customer deposits up from 44 per cent to 59 per cent, while the percentage of funding coming from the wholesale markets and with a maturity of less than a year had fallen from 36 per cent to 17 per cent.

Kelly said funding costs had continued to rise reflecting higher deposit costs and the improved composition of funding.

Westpac’s strategic investment priorities program is nearing completion.

It has 3.5 million online customers, with 40 per cent conducting transactions using their mobile phones. The bank’s expense to income ratio improved from 41.1 per cent in H112 to 40.6 per cent.

Kelly described the operating environment as challenging and low growth. In response Westpac is targeting higher growth areas such as deposits, personal wealth, trade finance and natural resources.

Kelly said the bank has improved cross-selling of products such that it has leading wealth penetration of 18.6 per cent.

Over 31 per cent of its retail and business banking business customers and 29 per cent of the St George Banking group’s customers have four or more products with the group.

However she noted that the group has a relatively low market share in insurance so there is a “lot of room” to grow there by selling life and general insurance to its customers.

The return on equity rose from 15.11 per cent to 16.13 per cent.

She said there are tentative signs of increased consumer confidence but she doesn’t expect business confidence to pick up until the 2014 calendar year.

Credit Suisse lead analyst Jarrod Martin said that both Westpac’s result and ANZ’s result on 30 April demonstrated that the banks have structurally changed their businesses to generate profit growth in a low growth environment. “That has been key and that has allowed them to increase dividends and shareholder returns.”

Martin noted other industries continue to complain about things such as the strength of the currency and online retailing.

Yet the banking industry has changed dramatically in recent years and the banks “have changed their business to suit and the results show what a good job the management have done.”

Ken Hanton, senior credit analyst at National Australia Bank, said it was a pretty strong result and that Westpac was exceptionally comfortable with its level of capital, hence the special dividend.

Additionally, “I got the feeling they think asset quality is as good as it gets. They have called out that their impairment charges have bottomed and are likely to rise from here.” During the presentation Kelly said the 17bp impairment charges to average loans was around cyclical lows and last seen in 2006.

Categories
Banking
Tags:
Westpac, Gail Kelly, Ken Hanton, National Australia Bank
Author:
Marion Williams, mwilliams@financialpublications.com.au
Article Posted:
May 06, 2013

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