Westpac’s loan quality and arrears improve in June quarter, but key test lies ahead

The bank has joined its peers in reporting improved loan quality, as attention turns to how borrowers will fare in the months ahead given aggressive rate hikes.

Westpac has joined its major bank peers in reporting improved June quarter loan quality and delinquency rates, as attention turns to how borrowers will fare in coming months given the aggressive interest rate hiking cycle.

In a market update on Monday, Westpac said credit quality improved with stressed assets to total committed exposure falling to 1.06 per cent in the June quarter. That was 4 basis points lower than the prior three months.

Home loans with repayments 90-days past due and classified as delinquencies declined in Australia by 5 basis points to 0.83 per cent, and dipped 2 basis points in New Zealand to 0.28 per cent.

Investors will be closely watching these metrics in coming months as four rapid-fire rate hikes by the Reserve Bank feed through to repayments and more borrowers come off record low fixed rate mortgages.

Westpac said the total amount set aside for impaired loans dropped to $4.54bn at June 30, even though it raised provisions for large institutional borrowers and changed some of its underlying economic assumptions.

The bank didn’t disclose cash earnings for the quarter ahead of ruling off its financial year on September 30.

Westpac’s common equity tier one ratio was 10.75 per cent as at June 30, down from 11.33 per cent three months earlier as it paid out a dividend, posted higher risk-weighted assets and a rise in capital deductions. The bank said including proceeds from asset sales – such as its life insurance and superannuation units – its pro forma common equity tier one capital ratio was 11 per cent.

The bank’s capital levels disappointed some investors and analysts, sending Westpac’s shares 1 per cent lower to $22.43 on Monday.

“Even allowing for some earnings in the fourth quarter and the 17 basis point benefit from the life insurance sale (already in our numbers), capital is tracking below our forecast,” JPMorgan’s analysts said.

“The weakness reflected strong risk weighted asset growth (3.9 per cent quarter-on-quarter, mostly due to higher interest rate risk in the banking book) as well as higher capital deductions for capitalised software/other.”

Westpac, led by Peter King, has joined its peers in reporting improved loan quality. Picture: Jane Dempster/The Australian

Citigroup analyst Brendan Sproules said while Westpac’s capital position was not as strong as expected, he still tipped third-quarter earnings were in line with his $1.6bn estimate.

“We leave FY22 estimated earnings forecasts largely unchanged, but have upgraded FY23 estimated earnings by circa 11 per cent. This reflects revised forecasts for deposit margin expansion,” he added.

Westpac’s risk-weighted-assets, the bank’s loans and assets weighted to their risk profile and how much capital has to be held against them, climbed $18bn in the June quarter to $478bn. The Westpac announcement rounds out the latest updates by the big four banks, as they look to benefit from higher interest rates but also brace for a rise in loan losses as repayment amounts soar and house prices pull back.

Commonwealth Bank last week said annual cash profit climbed 11 per cent to $9.6bn, from the prior year, as business lending volumes jumped and loan losses remained subdued.

CBA flagged that already announced rate hikes would trigger a quadrupling on monthly mortgage repayment outlays over the course of the calendar year. So far, though, the bank had seen only a “slight uptick” in requests for financial assistance.

National Australia Bank’s June-quarter update left investors concerned about revenue growth in the final months of its financial year, as several analysts noted softer-than-expected income and a larger rise in annual costs.

NAB’s unaudited cash earnings were $1.8bn in the three months ended June 30, up from $1.7bn in the same quarter last year. The bank’s credit quality improved with the ratio of loans 90-days past due falling 5 basis points to 0.7 per cent.

ANZ brought forward its June quarter update to coincide with its announced bid for Suncorp’s bank and associated capital raising. The bank’s gross impaired assets fell to 0.23 per cent and residential mortgages classified 90-days past due dipped to 0.48 per cent in the June quarter from 0.52 pent three months earlier.

But ANZ’s collective provision balance was $3.78bn as at June 30, up from $3.76bn as the bank remained cautious on expected loan losses amid a slowing economy and higher rates.

Helped by rising rates, ANZ said its net interest margin increased 3 basis points during the quarter and the underlying margin was up 6 basis points to 1.64 per cent, compared to its first half.