Westpac warning sparks share fall

An update from Westpac revealing soft income and rising loan stress led to a fresh sell-off in bank shares.

Investors fear the big banks’ earnings have peaked.

An update from Westpac revealing soft income and rising loan stress has intensified fears the big banks’ earnings have peaked, leading to a fresh sell-off in shares.

Adding to bearish sentiment following Commonwealth Bank’s soft results, Westpac yesterday revealed third-quarter non-interest income was about 5 per cent below the first-half quarterly average of $1.48 billion following lower markets revenue and higher insurance claims.

Stressed exposures also rose as the nation’s second-biggest bank suffered higher mortgage delinquencies and downgraded some business clients displaying “early signs of stress”.

Westpac led the sell-off, declining 2.63 per cent to $30.02. CBA sunk a further 1.9 per cent to $75.95 as analysts cut earnings forecasts in the wake of its lower than expected $9.45bn annual profit. NAB eased 1.05 per cent to $26.55 while ANZ slid 1 per cent to $26.48.

“It seems on most lines of revenue, things are just a bit tougher for everyone,” said Andrew Martin, a fund manager at Alphinity Investment Management.

“It’s no train smash — it’s just with every bit of new information you hear, it’s ‘that’s a little bit worse, that’s a little bit worse’.

“It confirms there’s not a whole lot of growth around for the banks, and therefore there’s going to be very little growth in dividends. So it’s up to the banks to pedal pretty hard on costs and productivity to eke out what growth they can.”

In Westpac’s “pillar three” regulatory update, the bank pointed to similar challenges reported across the industry this month, including rising funding costs pressuring margins and bad debt charges bottoming.

Like CBA, Westpac’s capital generation was healthy, pushing its common-equity tier-one capital ratio to 9 per cent of risk-weighted assets, including the recent stricter mortgage rules.

But growth is elusive, as highlighted by CBA’s second half to June 30, when revenue fell and all the bank’s key divisions suffered ­flat or falling profits.

Westpac assured shareholders that despite rising stress, overall asset quality metrics remained near “cyclical lows” with impaired assets down $52m and no new impaired exposures worth more than $20m emerging during the quarter to June 30.

It added that the overall bad debt charge was below the $333m first-half quarterly average.

But stressed assets rose to 12 basis points of total committed exposures as more customers in mining-exposed states fell behind on their mortgages. The bank’s “watchlist and substandard assets” rose $1.4bn due to increasing stress in mining-related regions for business bank customers and New Zealand dairy clients.

While the loans are still performing, Westpac downgraded a handful, such as a wholesale and retail trade company that supports the mining industry and a building products company.

Omkar Joshi, an analyst at Watermark Funds Management, said the banks were beginning to be hit by the “second-order impacts” of the slump in commodity prices.

Bell Potter analyst TS Lim, who cut his price target to $31.70, said Westpac’s capital adequacy remained strong and the bank should be able to maintain dividend payments.