Westpac cash profit falls 15pc to $6.85bn for 2019 full year

Westpac has posted a 15 per cent fall in full year cash profit, and a cut to its dividend.

Westpac has kicked off a $2.5 billion raising to boost its capital stores, as it reported a 15 per cent slump in full-year profit and a cut to its dividend.

Westpac halted trading in its shares and was preparing a placement of stock to institutional investors and a share purchase plan for retail shareholders, the bank said in an ASX statement on Monday. The bank expects the trading halt to remain in place until Tuesday morning when it anticipates completion of the institutional portion of the raising.

A deal sheet seen by The Australian put the deal price at $25.32 per share. Westpac last closed at $27.88. Citigroup, JP Mrogan and UBS are leading the capital raising for the bank.

New shares under the placement are expected to settle on November 7.

“The offer proceeds will be used to strengthen Westpac’s balance sheet and support customers’ growth. The additional capital will increase the buffer above APRA’s ‘unquestionably strong’ CET1 capital ratio benchmark of 10.5 per cent,” the deal sheet said.

Westpac is in part tapping investors because it needs to meet the prudential regulator’s “unquestionably strong” capital threshold of 10.5 per cent by January.

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Analysts give ANZ poor report card | Westpac profit tipped to fall 14pc

The share trading suspension came as Westpac reported that annual cash earnings fell to $6.85bn for the 12 months ended September 30, down 15 per cent compared to the prior year.

Analysts had expected annual cash profit to come in at $6.98bn.

Westpac chief executive Brian Hartzer labelled 2019 a “disappointing year”.

“Financial results are down significantly in a challenging, low-growth, low interest rate environment,” he said.

The final dividend came in at 80 cents per share, down from 94 cents. Several analysts had expected Westpac to cut its dividend.

Shaw and Parters analyst Brett Le Mesurier said earnings prospects were less favourable for Westpac’s 2020 year.

“The outlook is for lower earnings from FY19 to FY20 (excluding notable items) with a further 5 per cent decline in non-interest income possible,” he said. “The company’s commentary and actions suggest cash EPS (excluding notable items) closer to $2.20 in FY20.”

Reflecting the operating challenges in Australian banking, S&P Global Ratings on Monday said it expected “subdued earnings” for the industry over the next two years.

Despite Westpac’s profit drop S&P said the bank remained strong by global standards and would be helped by the capital raising and loan losses remaining low.

The big banks are navigating a tough climate as housing credit growth and the official cash rate hover at record lows, and they repay billions of dollars to customers after last year’s Hayne royal commission.

Westpac last month revealed an additional $341m after tax impact on second-half profit largely reflected customer repayments including interest, while a small part was due to the cost of running the program. Including the restructure of Westpac’s wealth division, total notable items in the six months ended September 30 were expected to print at $377m.

Last week, rival ANZ announced a profit drop and a dividend of 80 cents per share but franking disappointed investors at 70 per cent. National Australia Bank rounds out the reporting season for lenders that have a September 30 balance date on Thursday.

Westpac’s capital raising would consist a $2bn placement to large investors, while retail shareholders would get access to a $500m share purchase plan.

Westpac’s dividend cut marked the first time the payment has been sliced since 2009.

Mr Hartzer said the annual profit result was affected by customer remediation costs and a reshaping of the bank’s wealth business.

“Excluding these notable items, cash earnings were down 4 per cent on FY18, which was mainly due to a reduction in wealth and insurance income from the exit of our financial planning business, higher insurance claims, and the impact of regulatory changes on revenue,” he said.

“Importantly, 2019 has also been a watershed year where we’ve acted decisively to respond to the challenging conditions. We’ve progressed the implementation of a number of recommendations from the royal commission and our culture, governance and accountability self-assessment, and continued our focus on putting things right for customers.”

But Mr Hartzer also sounded a warning for the domestic economy, saying it would “continue to be subdued”, amid the ban’s expectations that gross domestic product would be below trend at about 2.4 per cent in 2020.

Consumers remained “cautious with flat wage growth constraining consumer spending”, he said.

“We expect the Australian economy will lift somewhat supported by lower interest rates, improved housing sentiment and targeted income tax cuts”

“We also expect the recent recovery in house prices, particularly in Sydney and Melbourne, to extend into 2020.”

The $2.5bn capital raising is expected to add about 58 basis pints to Westpac’s common equity tier one capital ratio.

Mr Hartzer told investors on Monday the decision to reduce the bank’s second-half dividend “was not easy”.

“We know many of our shareholders rely on our dividends for income. However, we felt it was necessary to bring the dividend payout ratio to a more sustainable medium-term range given the capital raising and lower return on equity,” he said.

Westpac’s net interest margin - what it earns on loans minus funding costs - declined 10 basis points to 2.12 per cent.

The consumer bank saw cash earnings dip 4 per cent on lower fee income and impairment charges. The business bank division posted earnings that were 12 per cent down, hit by notable items, while the institutional bank had a 7 per cent drop in earnings.

The only division to see a rise in cash earnings was Westpac’s New Zealand arm, where income edged up 3 per cent.