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Westpac robbed of record profit
May 2 2016
Elizabeth Knight
Westpac has been robbed of the opportunity to declare a record profit by four major companies including Slater & Gordon, steel maker Arrium and US coal giant Peabody.
It was $252 million of poor loans to this troika and another company, believed to be transport group McAleese, that have been the major factor in Westpac declaring a weaker profit than the previous six months.
The government, meanwhile, has been robbed of the chance to use headlines about record bank profits as more evidence of their greedy culture.
Beating up on banks over their various conduct-related atrocities has become the latest game in town for political parties in election mode.
Maximum pressure
The government will readying itself – in the event the Reserve Bank decides to cut interest rates on Tuesday – to apply maximum pressure to banks to pass any cut on to their customers.
The betting from economists is 50:50 on a rate cut on Tuesday. I will be placing my money on the RBA holding this month.
If Westpac's profit performance is anything to go by, the banks, three of which will report their profit performance this week, will be hit by risky lending decisions made over the past few years.
While Westpac's cash earnings in the half moved up a relatively tepid 3 per cent – which was below the market's expectations.
Its earnings per share fell 2 per cent over the six months to March 2016 compared with the previous corresponding period.
The lower earnings per share and return on equity – both measures investors are particularly crucial – are due to raising $6 billion in equity last year to fortify its capital position, a move forced on all banks by the finance regulator.
Growing share of retail
The impact of strengthening capital hit Westpac's consumer bank, even though this division managed to grow cash earnings 16 per cent in the half versus the corresponding half in 2015.
Indeed, Westpac has taken market share from its competitors in both mortgage lending and deposits.
The business bank, which looks after the small and medium-sized corporates, had a reasonable half.
It increased core profit 5 per cent but also suffered at the hands of a $118 million increase in impairments and, in particular, car loans delinquencies.
Those big corporate impairments sit with what Westpac calls its "institutional bank". This is where margins have further deteriorated. Not surprisingly its earnings fell $136 million.
Many headwinds
Investors understand that banks are facing some regulatory, conduct-related capital and broader economic headwinds but they will need to be reassured that these issues have not migrated into a more widespread deterioration in asset quality.
Westpac boss Brian Hartzer seemed to provide a bit of comfort on this on Monday. He said he thought asset quality would remain sound overall.
"Company balance sheets are generally in good shape, having used lower interest rates to pay down debt and levels of stress remain low," he said.
"We expect some increase in consumer delinquencies over the second half, but this is likely to be concentrated in segments and sectors that are more reliant on the resources industry."