Westpac boss predicts soft economic landing despite customer stress

Westpac boss Peter King says the economy is on track for a soft landing, even as customer stress has ticked up, and the bank posted a 16 per cent drop in profits.

On Monday, Westpac reported a net profit of $3.3 billion in the six months to March, down 16 per cent from the same period last year. Excluding once-off items, the bank’s net profit was down 8 per cent over the year.

Westpac boss Peter King said the economy was on track for a soft landing but that it was not certain.Credit: Louise Kennerley

Westpac announced a 75 cent interim dividend, up from 70 cents last year, a 15 cent special dividend and a $1 billion increase in buybacks, which King said reflected the bank’s strong capital position.

“We’ve managed growth and margins in a disciplined way amid a slowing economy and competitive banking sector,” King said. “The impact of competition on mortgage margins moderated this half.”

Shares in Westpac closed 2.7 per cent higher at $27.12 a share on Monday.

Westpac’s net interest margin, a core measure of profitability comparing a bank’s funding costs with what it charges for loans, fell 7 basis points to 1.89 per cent, largely reflecting mortgage competition which King said had started to cool in the six months to March.

Despite continued pressure from mortgage and deposit competition for the broader banking sector, Westpac grew its mortgages and deposits by 5 per cent and business lending by 9 per cent over the year. Its operating expenses increased 8 per cent to $5.5 billion which the bank said was due to higher software amortisation expenses and inflationary pressure on wages and third-party vendor costs.

King said Australians were doing it tough as a result of higher interest rates and cost of living.

“More customers are calling us for assistance, and we’re helping those who need it,” he said. “While we’ve seen an uptick in stress in our loan books, this is to be expected given the large increase in interest rates, high inflation and taxation.”

The bank’s stressed exposures as a proportion of its total loans rose to 1.36 per cent from 1.1 per cent last year, as it lifted its provisions for impaired loans to $5.1 billion, up from $4.9 billion a year ago.

King said the Australian economy was proving resilient with unemployment remaining low by historical standards, but there had been a slowdown in the economy.

“While inflation has fallen, getting it down to target range is proving difficult globally and here in Australia,” he said. “It is likely interest rates will stay higher for longer. The global economy also faces potential challenges. We are closely watching the ongoing economic risk from geopolitical conflict and uncertainty playing out in the Middle East and Europe.”

UBS head of Australian bank research John Storey said Westpac’s result was largely in line with consensus expectation, with the bank’s business and wealth division contributing to a stronger result and overall cost growth.

“We find the capital return element, including the 15 cent special dividend and $1 billion increase in the buyback, encouraging,” he said. “Against this, we note a worse than expected deterioration in asset quality and lower overall provision coverage.”

Jarden chief economist Carlos Cacho said Westpac’s update was overall a solid result, driven by a better-than-expected net interest margin and lower-than-expected bad and doubtful debts.

“The bank’s stabilisation of core net interest margin over the last six months is a clear positive and suggests that the margin drag is now largely behind it,” he said.

“While guidance was limited, the continued moderation in competition should be a positive.”

The Business Briefing newsletter delivers major stories, exclusive coverage and expert opinion. Sign up to get it every weekday morning.