Westpac posts full year cash profit of $7.82bn, in line with last year

Westpac has posted flat full-year earnings and kept its dividend unchanged, but has been forced to lower its return targets.

A steady result: Westpac CEO Brian Hartzer. Pic: James Croucher

Westpac has broadly met expectations as it reported flat earnings for the full year and kept its dividend unchanged, although market headwinds have forced it to lower its return targets.

For the 12 months to September 30, the bank (WBC) booked cash earnings of $7.82 billion, in line with last year and analyst projections.

Westpac’s net profit dipped 7 per cent to $7.45bn, just shy of forecasts for a reading of $7.61bn.

On a divisional basis, the group’s consumer banking unit saw cash earnings rise 14 per cent for the year, while its business bank saw earnings inch up 1 per cent, its BT Financial and New Zealand units reported 4 per cent reductions in earnings and its institutional bank logged an 18 per cent decline.

The group also reported a 5 per cent slide in cash earnings per share and a 185 basis point reduction in return on equity to 14 per cent.

Chief executive Brian Hartzer said the bank would trim its return on equity target down from 15 per cent given challenging market conditions.

“Given the current operating environment, including the expectation that low interest rates will continue for some time, the evolving regulations for capital and liquidity, and higher regulatory and compliance costs, the current 15 per cent RoE target for the group as a whole is no longer realistic,” he said.

“Westpac believes in maintaining strong return disciplines and will be seeking to achieve a RoE in the range of 13 to 14 per cent in the medium term.”

Westpac’s dumping of its RoE target -- which was set by former chief Gail Kelly -- comes after ANZ also ditched its 16 per cent target.

Mr Hartzer said of the new target of 13-14 per cent: “We’re at the top end of the top end of that range this year. What we’re trying to recognise is that the environment has gotten tougher particularly on rates and the ongoing increase in regulatory costs and the like, we still have some uncertainty about capital (rules).

“So we felt over the medium term it wasn’t probably realistic to get back to a 15 per cent level. that isn’t to say we aren’t going to continue to manage capital very carefully and continue to drive earnings growth. We’re saying this is probably a realistic range given all the things we’re dealing with in the medium term.”

Westpac bucked the trend in the sector by reporting a 5 basis point rise in its net interest margin to 2.13 per cent, although higher funding costs and lower interest rates crimped margins in the second half compared to the first.

“We are continuing to deliver our service-led strategy, increasing customer numbers, delivering world-leading digital services, and supporting more customer needs,” Mr Hartzer said.

“At the same time we have strengthened our balance sheet, carefully managed margins, and achieved $263 million in productivity savings, while increasing our investment in digital and other service initiatives.

“The result demonstrates our consistent approach to managing our core franchise over many years, including the discipline we apply to balancing growth and returns.”

Impairments jumped 49 per cent as against the prior corresponding period, although much of the damage was done in the first half, with the second half charge of $457 million coming in 31 per cent below the prior six months.

“Credit quality remains sound; however, the level of stressed assets rose modestly over the year by 21 basis points to 1.2 per cent,” the bank said.

“The second half saw an increase in stressed exposures, reflecting continuing low prices for NZ dairy products and the ongoing impact of the slowdown in mining investment on some regions.”

Mr Hartzer expressed optimism about the local economy, although he suggested lending growth will stall at current rates, while house price expansion is tipped to slow over the coming 12 months.

“Financial system credit growth is likely to be in line with the current year at around 5.5 per cent,” he said.

“Housing credit growth is likely to ease a little as price growth slows. Business credit growth is likely to improve moderately as it rebounds off a low base.”

The bank reported a tier-one capital ratio of 9.5 per cent, down two basis points, with Mr Hartzer seeing a buffer zone for more stringent regulatory requirements.

“Given the strength of our business and our balance sheet, we are well placed to respond to any additional regulatory requirements,” he said.

“With top-quartile capital, healthy liquidity, and sector-leading asset quality, we remain in a strong position to respond to the volatile global environment.”

The bank reported a rise in full-time employees despite its challenges through the year, with a sharp uptick in hiring through the second half.

By the end of the second half, the group had 35,280 full-time staff, up from 34,677 at the end of the first half and 35,241 at the same time last year.

Westpac declared a final dividend of 94c per share, in line with its interim dividend and the corresponding dividend last year.

Mr Hartzer said that while the dividend payout ratio of 80 per cent was “a little higher than we would consider is sustainable” in the longer term, the board opted to maintain the final payout at 94c due to the bank’s confidence in its capital ratio and “significant” surplus of franking credits.

With Michael Bennet