Westpac scraps first-half dividend on highly uncertain outlook, quarterly earnings rise

Westpac has become the first major bank not to pay an interim dividend as boss Peter King warned of a ‘highly uncertain’ outlook.

Westpac CEO Peter King handed down the bank’s third-quarter results on Tuesday. Picture: Jane Dempster.

Westpac has become the first major bank to opt not to pay an interim dividend as it warned of a “highly uncertain” outlook, even as third-quarter earnings increased.

The board had decided not to pay a first-half dividend and would next consider a payment after ruling off its financial year on September 30, Westpac said in an ASX statement on Tuesday.

Unaudited cash earnings rose to $1.32bn for the three months ended June 30, compared to a quarterly average in the first-half of $497m, due to lower impairment charges. The earnings result was up 19 per cent when “notable items” such as customer refunds and costs linked to legal action by financial crimes regulator Austrac were taken into account.

At 11.08am Westpac shares were down 3.4 per cent to $17, as investors digested the update and lack of dividend. The local bourse inched up in early trading.

In May Westpac deferred making a decision on its first-half dividend, after the banking regulator issued a warning about COVID-19 and said financial institutions should “seriously consider” putting off dividend deliberations.

“Our third quarter 2020 result excluding notables is higher than first half average, mostly due to lower impairment charges. Nevertheless, the impact of the COVID-19 pandemic is clear as activity fell and margins declined,” Westpac chief executive Peter King said.

“While the domestic and global outlook remains highly uncertain, Westpac continues to be well positioned to support our customers.”

The bank expects the economy to contract 4 per cent in 2020, before rebounding to 3 per cent growth next year. It anticipates unemployment will peak at 8 per cent, while residential property prices will slump 10 per cent in 2020.

Westpac’s net interest margin - what it earns on loans less funding and other costs - fell to 2.05 per cent, down eight basis points underscored by record low interest rates. The bank’s third-quarter impairment charge was $826m, or 46 basis points of gross loans on an annualised basis.

Westpac did warn of “early signs of deterioration” across its loan book, with stressed exposures up 44 basis points to 1.76 per cent of the total committed. That reflected a rise in high-risk business and institutional customers and an increase in mortgages with repayments 90 days or more past their due date.

As COVID-19 continues to grip the domestic economy after a renewed lockdown in Victoria, the Sydney-based bank’s results showed the number of its customers on loan repayment pauses had tumbled.

There were 78,000, or $30bn, in mortgages on a repayment deferral at July 31, down from 135,000 or $51bn in total relief packages provided. Westpac said it had contacted 85 per cent of customers that had requested a repayment pause, and expected about half to return to making payments.

The bank said repayment relief was given to more than 31,500 small business customers.

The bank’s common equity tier one capital ratio remained steady at 10.8 per cent.

Bell Potter analyst TS Lim said Westpac’s decision not to pay a first-half dividend was linked to a desire to “conserve capital”, given its weaker ratio compared to the bank’s major peer group.

“Another clearing of the decks no doubt under CEO Peter King, at least they are able to make tough decisions where it matters most,” he added.

The decision not to pay a dividend is highly unusual for Westpac as it continued to make payments to investors even during its near-death experience in the early 1990s and the global financial crisis in 2008.

The 2019 interim dividend was 94c per share, which dropped to 80c for last year’s final payment.

On Tuesday, Westpac increased its total expected credit loss provision to $6.34bn as at June 30, from almost $5.8bn three months earlier.

Westpac had in April set aside $1.6bn for COVID-19 related loan losses, and had provisioned for a $900m penalty for more than 23 million breaches of financial crimes laws to Austrac. The regulator is said to be pushing for a penalty of $1.5bn.

Westpac’s presentation on Tuesday noted Austrac was investigating matters relating to threshold transaction reports and 276 customers, many of whom were the subject of suspicious matter reports related to potential child exploitation. The regulator has indicated it may include allegations arising from these investigations in any amended statement of claim lodged with the bank and the court.

An amended statement of claim is due to be provided to Westpac by September 25.

Last week, National Australia Bank outlined a 7 per cent decline in third quarter cash earnings to $1.55bn compared to a year ago, and cited early signs of a “modest” deterioration in credit quality.

Commonwealth Bank handed down an 11.3 per cent drop in full-year cash profit to $7.3bn last week, as it declared its lowest final dividend since 2006. That was due to the Australian Prudential Regulation Authority revising its dividend guidance in July, allowing for banks to pay up to half their earnings in payments to shareholders.

ANZ – which like Westpac held off on making an interim dividend decision – reports its third-quarter earnings on Wednesday and will provide an update on dividend payments.

Regional players Bendigo and Adelaide Bank and Bank of Queensland have also deferred recent decisions on dividends.