Profits stall as Westpac taps debt markets
Westpac has posted unaudited first-quarter cash earnings in an unexpected update as it prepares to tap funding markets.
Westpac’s first-quarter trading update has provided fresh evidence of flatlining local bank earnings this year, and pointed to the bank preparing to tap US funding markets.
In a surprise update, as Westpac had stopped providing quarterly market updates, the bank said unaudited cash earnings came in at $2.04 billion in the three months to December 31.
That compares to the quarterly average of its second half of 2018 of $1.91bn, or $2.05bn before customer remediation charges.
Sources suggested the update was made to allow Westpac to tap favourable funding markets in the US. This could suggest an upcoming bond or subordinated debt deal.
The majority of first-quarter term funding issuance was via Australian dollar and euro-denominated transactions.
On the earnings front, Westpac joins two of its rivals this month in highlighting a challenging environment.
Commonwealth Bank’s cash profit fell 2.1 per cent for the six months to December 31 to $4.77bn, affected by lower net interest margins and weaker trading income.
National Australia Bank’s first-quarter update — which was overshadowed by the exit of chief executive Andrew Thorburn and flagged departure of chairman Ken Henry — showed cash earnings growth declining 3 per cent.
Still, Westpac said that during the first quarter net interest margins — excluding its treasury and markets unit — were higher, after it raised home loan interest rates late last year.
The quarter suffered from challenging trading conditions in treasury and markets and $30 million pre-tax in insurance claims from the devastating Sydney hailstorms.
The result also showed some worsening in arrears rates in Westpac’s consumer lending book, and pointed to more customer remediation costs coming through in the three months to March 31.
UBS banking analyst Jonathan Mott cautioned that Westpac had started to see more switching from interest-only loans to principal-and-interest and an edging up in arrears in unsecured consumer lending.
“Overall this trading update was broadly in line with our forecasts, which remain unchanged,” he said. “However, it is a reminder of the challenges facing Westpac and the other Australian banks as house prices continue to fall and economic activity slows.”
Westpac’s interest-only loans fell to 32 per cent of its total portfolio, from 35 per cent at September 30. The stock inched up 0.15 per cent to close at $26.28.
Shaw and Partners analyst Brett Le Mesurier said lower customer remediation costs and home loan repricing buoyed Westpac’s net interest margin in the first quarter.
“The combination of these factors is estimated to add six basis points to net interest margin from 2H18 to 1H19,” Mr Le Mesurier told clients.
“(Westpac’s) cash earnings for 1Q19 put it on track to achieve $8.3bn in cash earnings for FY19, excluding remediation costs. These costs were $380m pre-tax and $281m after-tax in financial-year 2018.”
Expenses printed lower in the quarter after Westpac divested its Hastings division and the bank dodged additional costs associated with the Hayne royal commission and customer remediation. “No material remediation charges (or associated costs) were booked in 1Q19 although additional charges are likely to be incurred in 2Q19,” Westpac said.
The second quarter will also see an additional $35m in pre-tax claims costs, after reinsurance, from the recent Queensland floods.
The period also included an impairment charge of $204m.
Australian mortgage delinquencies were four basis points higher, while consumer unsecured delinquencies were also higher, up 10 basis points.
Westpac’s common-equity tier-one (CET1) capital ratio stood at 10.4 per cent as at December 31, lower than three months earlier due to the payment of the bank’s final dividend.
The statement also said the adoption of new accounting standards would result in an increase in Westpac’s collectively assessed provisions of $974m, a reduction in retained earnings, an increase in deferred tax assets and a $3.9bn decline in risk-weighted assets. The change will also prompt a rise in reported stressed assets and a two-basis-point increase in the CET1 capital ratio.
Westpac announces interim earnings in May.
Statutory net profit for the three months to December 31 came in at $1.95bn.
Westpac’s trading update came as the corporate regulator confirmed a report by The Australian that it was appealing against part of a December ruling against it by the Federal Court.
The Australian Securities & Investments Commission will continue to press that Westpac breached the law by giving customers advice to urge them to move their superannuation to its BT Financial unit.
ASIC yesterday said it wanted “further clarity and certainty” on the difference between general and personal advice for consumers and financial services providers.
“It is important for a regulator to seek clarity from the court on pivotal statutory provisions within its remit. The dividing line between personal and general advice is one of the most important provisions within the financial services laws,” ASIC deputy chair Daniel Crennan QC said. “It directly impacts the standard of advice received by consumers. This is why ASIC brought this test case and ASIC believes further consideration by the full court of the Federal Court is necessary.”
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