Westpac posts jump in first quarter earnings

Westpac chief Peter King says supply issues are largely driving house price rises, but the Australian economy is well placed to navigate that.

Westpac CEO Peter King is upbeat on the economy’s prospects in 2021. Picture: Jane Dempster/The Australian.

Westpac chief executive Peter King says supply issues are largely driving price rises in the housing market, but the Australian economy is well placed to navigate that and dodge a fiscal cliff as COVID-19 stimulus is wound back.

His comments came as Westpac posted a strong start to its financial year with a jump in December-quarter earnings, which were buoyed by an improved economic outlook and better-than-expected credit quality.

Loan repayment pauses related to the pandemic come to an end late next month, around the same time that JobKeeper payments are reduced. But Mr King says he is positive on the recovery in confidence, employment and overall economic activity.

“I don’t like this cliff analogy,” Mr King said. “We’re are just going through stages… Yes, we have further changes coming with government stimulus, but we’ve got a banking system that’s in great shape to help people through the period, we’ve got low interest rates which will help, we’ve got domestic activity hopefully continuing to pick up so there’s positive signs there.”

On the housing market, -where Westpac expects residential prices to rise 4 per cent this year and 10 per cent in 2022 - Mr King said dwindling supply was causing price pressure.

“There’s not enough supply in the market, so it’s not a surprise that prices are going up because there are plenty of people that want to buy,” he added. “You’re seeing the clearance rates at record highs.”

Mr King shrugged off concerns of any loosening of bank credit standards, saying they assessed a borrower’s ability to pay on interest rates well above the prevailing rates.

“I’m sure the regulators will continue to look at it and if prices continue to go up they may look at macroprudential (measures), but that doesn’t feel like it’s close.”

Minutes from the central bank’s February board meeting showed they discussed the impact of low interest rates on economy stability and acknowledged “risks inherent in investors searching for yield in a low interest rate environment, including risks linked to higher leverage and asset prices”, particularly in housing.

Mr King outlined that Westpac was making good progress, although still had “much to do” to fix its compliance issues and systems after last year agreeing to pay a record $1.3bn penalty to financial crimes regulator Austrac.

“The year has started well we are seeing signs of improvement in the position of customers and in our business and we’re confident that were on the right path to turn Westpac around,” he said.

Westpac will lodge its remediation plan for an enforceable undertaking with the banking regulator at the month’s end.

The bank’s core net earnings - which exclude notable items - climbed 28 per cent to $2.4bn in the three months ended December 31, compared with the average quarterly result in the prior six months.

December quarter unaudited statutory net profit printed at $1.7bn, more than double the second half quarterly average of $550m. Unaudited cash earnings also surged to $1.97bn in the quarter, up on the second-half’s quarterly average of $808m.

The positive update spurred a 4.6 per cent rally in Westpac’s shares to $23.54 on Wednesday.

“Westpac has made good progress in moving towards resolving its challenges,” Regal Funds Management’s Mark Nathan said. “Capital generation was excellent. This leaves Westpac in a strong position to normalise its dividend. However, tempering this, I would expect Westpac to be conservative.”

Westpac’s Wednesday statement showed an impairment benefit of $501m from improved credit quality, and stronger economic outcomes.

The bank said the improving economic climate contributed 55 per cent of the reduction in loan loss provisions. Westpac expects the economy will expand 4 per cent this year.

The bank’s net interest margin - what it earns on loans minus funding and other costs - edged up three basis points to 2.06 per cent as at December 31 from September 30.

But Westpac’s finance boss Michael Rowland cautioned analysts the bank’s strong first-quarter performance was unlikely to be continued.

“While the quarter earnings were solid, and economic trends are improving, the strong first-quarter result is unlikely to be matched over the remainder of the year,” he said.

On a statutory basis, Westpac’s net interest income was up 1 per cent in the December quarter to $4.2bn, while non-interest income which largely reflects fees grew 6 per cent to $986m. That was compared to the average of the quarters in Westpac’s second half.

The bank, like its competitors, also showed a continued decline in loans on COVID-19 repayment deferrals, although Westpac’s home loan balances in that category remained somewhat elevated. Mortgages on repayment pauses were down to $10.7bn as at January 31, from a total of $55bn since March 2020.

Small business loans on repayment deferral sat at $400m, from $9.5bn in total since the pandemic started to grip the economy last year.

Credit Suisse analyst Jarrod Martin labelled the Westpac quarterly update as positive.

“Notwithstanding a large benefit from write-backs the underlying result was strong across the board with improved margins, expenses contained and a 12 per cent pro-forma CET1 (common equity tier one ratio). In addition positive commentary around restoring mortgage growth is likely to see the market react positively,” he said.

Westpac’s common equity tier one ratio came in at 11.9 per cent as at December 31, up 74 basis points from three months earlier.

Westpac’s notable items during the quarter amounted to $212m and included refunds, payments, costs and litigation, writedowns of intangible assets, and the impact of a loss on the sale of Westpac’s Pacific operations. The intangible asset adjustment reflected the writedown of goodwill for Westpac’s Lenders’ Mortgage Insurance unit, which is flagged to be sold.