Net loans up $8.9bn due to boost in owner-occupied mortgages
Despite rising interest rates and a slowdown in the property market, Westpac says its mortgage portfolio grew by 2% in the half-year ending September.
The big four bank, which announced its full-year results on Monday covering the 12 months to Sept. 30, said the mortgage portfolio reached $467bn over the full year.
Net loans increased by $8.9bn (2%) in the second half of the year, compared to the first half (ending March 2022). Westpac said this was due to growth in owner-occupied mortgages ($10.6bn).
Business loans were $86.3bn over the year, up 5% compared to the first half.
Read next: Learn to use life insurance to build wealth
Investor mortgages were $0.8bn lower in the second half compared to the first half, which the bank said was mostly from a decline in mortgages with a business purpose, and lower interest-only mortgages.
Consumer investor mortgages were slightly higher over the second half-year, Westpac said. Other personal lending was down 1%, most of which were lower personal loans, and credit card balances changed little.
Delinquencies for mortgages of 90-plus days were 0.69%, down 13 basis points in the half-year, and down 30 basis points from the financial year ending September 2021.
Overall, Westpac announced full-year cash earnings of $5.28bn, down 1% ($76m) compared to the 2021 financial year.
The bank confirmed statutory net profit was $5.7bn, up $236m (4%) compared to the full year ending September 2021.
The increase in net profit was largely due to a reduction in expenses, but was partly offset by lower non-interest income, which included a $1.1bn loss on the sale of the Australian life insurance business, Westpac said in its full-year financial results report.
Expenses were down 7%, which it said was driven by its “simplification program” and a reduction of 2,667 full-time employees. The bank has revised its original FY24 cost target to $8.6bn, in light of higher inflation including wage increases, and continuing regulatory spend.
The net interest margin (which compares funding costs with what the bank charges for loans) was 1.93% in the full-year, up five basis-points compared to the first half. The bank said margins were lower in the first half-year and were higher in the second half as interest rates began to rise. In aggregate, net interest margins were lower for the year, which the bank said was mostly due to “intense competition across mortgages and business lending” and a significant increase in low returning liquid assets.
The bank declared a final dividend of 64c per share in the half-year to September 2022, up from 61c in the first half of the year ending March 2022.
After the work over the past two years, Westpac CEO Peter King (pictured above left) said Westpac was now a simpler, stronger bank. The bank was continuing to get costs down, simplifying operations and its program of co-locating branches in similar locations removed duplication, he said. It had invested in the launch of its digital mortgage and new personal finance management tools, available in the Westpac app.
“Our year-on-year results are solid and over the past six months in particular, we have demonstrated momentum, with core earnings (ex-notable items) up 12% and our net interest income up 7%. Margins increased 5bps in the second half to 1.90% but they remain below historical levels,” King said.
King, along with Westpac CFO Michael Rowland (pictured above right) announced the bank’s full-year results via webcast on Monday morning. Confirming the banks’ home loan and business lending book had grown, King said it was a “solid” financial result.
“Westpac returned to growth in our key segments of Australian mortgages and business lending. In the second half, our banking divisions delivered strong growth in core earnings on the back of good cost and margin management,” King said.
Read next: CBA posts $9.6bn in full-year results
The webinar included a question-and-answer session, in which King responded to questions about the bank’s forecasts, credit provisions, application volumes and retention of fixed rate customers as loans mature.
The bank said earlier it was forecasting a cash rate peak of between 3.5% and 4%. In response to a question about whether the RBA’s revised inflation forecast of 8%, and a little above 3% in 2024, had changed the bank’s outlook and how that might impact impairments, King said the bank was highlighting that interest rates would need to rise from here to slow the economy – and slow inflation.
King noted that the RBA had moved back to 25-basis-point steps and would review data to chart its future course. Time would decide exactly where interest rates need to peak, he said.
“If I step back, what we’ve got is a very strong economy, record-low unemployment, and we’ve got interest rates rising quickly … at this point, we’ve seen housing prices go down [but] we haven’t seen spending really slow down,” King said.
Due to long lead times in the impact of interest rates on borrowers, King said Westpac hadn’t yet started processing the last three interest rate increases in monthly mortgage repayments.
Referring to credit quality in aggregate, King said most larger metrics were back to pre-COVID levels. Although Westpac was at the same levels, the bank is maintaining 18% higher provision coverage in the view there may be additional stress, he said. The bank hadn’t released a forecast, but King said extra provisions were in place and that an update would be provided in the bank’s next half-year results.
“We recognise with borrowing costs, energy costs, with food costs all going up, some people will need time and there might be some write-offs,” King said.
In response to specific areas of the economy, or specific areas of business the bank was concerned about, King acknowledged that discretionary spending is the part of the economy that reduces as people spend more of their income on interest costs, energy and food.
“Anything that’s associated with discretionary spend in the economy, some small businesses that concentrate on [it] is what we’re watching particularly closely,” King said.
The proportion of customers rolling off fixed interest rates onto variable rates that were retained by the bank was around 86% over the second half of the financial year, he said.
Westpac expects both business credit growth and housing credit growth to moderate, King said. He noted that the economic forecast for housing lending is 3.6% next year, and for business lending is 2%.
Whether lending slows down that quickly will depend on how the economy reacts, but King said the bank was planning for slower growth compared to the last financial year.
Commenting on loan application volumes and the percentage approved and rejected compared to a year ago, King said approval rates in aggregate were consistent and largely unchanged.
“We are expecting lower application levels just in what’s happening in turnover in the market,” King said.
The bank reported that owner-occupier mortgages were up $10.5bn between March and September. With forecasts of lower volumes going into 2023, King said the bank was focused on its services to both the first party and the broker channel.
“That’s all about speed … both channels (first party and third party) play an important part in Westpac mortgages,” King said.
