Westpac may cut dividend as profit tipped to fall 14pc

Westpac is expected to report a fall in its profit for the past financial year and some analysts say it will also cut its dividend.

Westpac’s cash net profit is expected to fall almost 14pc to $6.98bn for the year ended September.

Westpac is expected to report a fall in its profit for the past financial year due to the impact of customer remediation charges and slower mortgage growth and some analysts are predicting it will also lower its dividend for the first time in a decade amid ongoing pressure on earnings.

The bank is expected to reveal on Monday that cash net profit fell almost 14 per cent to $6.98bn for the year ended September 30, after adjusting for $377m in pre-disclosed notable items including $341m in customer remediation and $36m in wealth division restructuring costs, according to Bloomberg’s consensus estimate.

Most expect the dividend to stay at 94c a share for the half year, but Morgan Stanley and Macquarie analysts are among those predicting it will be cut for the first time since 2009 as Westpac’s earnings come under pressure from slow loan growth and narrowing margins.

Morgan Stanley’s Richard Wiles has warned Westpac is the “most likely” of the banks to cut its dividend. He expects a 15 per cent cut to 80c a share for the second half, from 94c in the first half.

“However, based on our earnings forecasts, this would still leave it with a payout ratio of about 74 per cent in the 2020 financial year, meaning there is potential for an even larger reduction in the dividend,” Mr Wiles said in a report last week.

He also expects Westpac to report a common equity tier-one capital ratio of about 10.45 per cent.

Westpac last traded at $27.88

But because CET1 ratios are typically lower in the first quarter, Mr Wiles thinks it will be a challenge to meet the “unquestionably strong” benchmark of 10.5 per cent by January 1 without ongoing capital build and or asset sales to release capital.

He expects Westpac to raise about $2bn by partially underwriting its dividend reinvestment plan. Apart from the dividend and capital requirements, key areas of focus include underlying trends in net interest margins, loan growth, costs, potential remediation charges – in relation to customers and Austrac — and trends in stressed exposures, according to Morgan Stanley’s Mr Wiles.

In regard to costs, he says if revenue trends don’t improve, Westpac will need to accelerate productivity initiatives and cut costs to prevent a further decline in profitability.

Macquarie’s Victor German says earnings are under pressure from lower rates and narrower front-to-back book spreads despite a partial pass-through of Reserve Bank rate cuts to mortgage rates.

Over the medium term, he expects a margin benefit of 3-5 basis points from mortgage repricing to be partly competed away if front-book rates remain competitive, and after APRA’s regulatory guidance and pending RBNZ capital rules, the sector ex-CBA faces a $13bn capital shortfall.

“As a result, we expect capital to increase from current levels or for banks to look to optimise their portfolios,” Mr German said.

He also expected Westpac to cut its dividend in the upcoming result and supplement it with an underwritten dividend reinvestment plan.

“The impact of lower rates, front-to-back book gap, and additional required investment leaves ongoing risk to earnings and consensus expectations. As a result, we remain cautious on the sector,” Mr German said.