Competition, investor lending impacts loan growth
Westpac Group has announced a statutory net profit of $3.28 billion in the first half of 2022 - down 5% year-on-year but up 63% compared to the second half of 2021.
Delivering its half-year 2022 result on Monday, Westpac Group, which includes Westpac, St. George Bank, Bank of Melbourne, Bank SA, BT, and RAMS, said financially, the group’s results showed improvement over the previous six months.
Cash earnings were $3.095 billion, down 12% year-on-year, but up 71% compared to the second half of 2021.
Cash earnings for the consumer division were $1.64 billion, down 15% year-on-year, driven from a lower net interest margin and reduced credit impairment benefits. Cash earnings for the business division were $239 million, down 55% year-on-year.
Westpac CEO Peter King (pictured) said the drop in cash earnings over the year was mostly due to “competitive pressures on net interest margins.”
The drop was also due to returning to an “impairment charge” (broadly described as economic overlays put in place during the uncertain environment), after having benefits last year.
“Asset quality has improved, and most credit quality metrics are back to pre-COVID levels, however we increased overlays in our provisions for supply chain issues, inflation, expectations of higher interest rates and recent floods,” King said.
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Mortgage lending increased 3%, but margins were 25bps lower due to competition, more fixed rate lending and lower card and personal loan balances, the bank said.
Revenue was down 8% year-on-year, down 3% compared to the second half of 2021. Costs were down 10% year-on-year, down 27% compared to the second half.
“I’m pleased with our progress on costs which are down 27%, (or 10% excluding notable items), compared to the second half of 2021. This includes a reduction in headcount of more than 4,000 as we track towards our target of an $8 billion cost base by FY24,” King said.
Total lending was $8.8 billion and total deposits were $20.6 billion, increasing Westpac Group’s deposit-to-lending ratio to 83.5% over the half-year.
“Our Australian mortgage portfolio grew off the back of owner-occupied mortgages, but we want to lift performance in investor lending. We have built on our momentum in business lending across both Business and WIB,” King said.
The board has determined an interim, fully franked dividend of 61c per share, paid on June 24, 2022.
Speaking at a teleconference webcast on Monday morning, King said this half-year, reported profit and cash earnings were “up significantly.”
The large fall in notables, from $1.3 billion to $6 million, was the big driver, he said. The 10% reduction in costs more than covered the decline in revenue, he said.
“Revenue was lower while we navigated low interest rates and the competitive market … but then pressure eased through the half,” King said.
Referring to consumer mortgages, King said the bank was particularly challenged by low rates and competition but was more positive on the future.
In recognition that “digital is vital,” the bank was building capability into existing apps, but King also noted there were opportunities to improve its service to brokers.
“We have made progress in mortgage processing, including the expansion of digital applications, however, there is more to do as we complete the roll-out of our new system to third-party brokers,” King said.
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Westpac Group chief financial officer Michael Rowland said competition for new lending compressed the bank’s margins. Lower Australian investor lending impacted loan growth, he said.
In reference to mortgages, Rowland said while the bank achieved “good growth” in owner-occupier, it was offset by a contraction in investor lending.
“We had solid growth in owner occupier, but investor continued to contract,” Rowland said.
Rowland said there were three key factors driving the decline in investor lending.
“First, outflows have been elevated, from our decision to run down lending to self-manage super funds, and to foreign buyers,” Rowland said.
The bank also experienced higher run-off for certain interest-only lending, he said.
“Second, we’ve been out of the market on investor-lending policies – this is being addressed and is yet to be reflected in new flows,” Rowland said.
When rolling out its platform, the bank prioritised owner-occupied mortgages, but further service improvements were required, he said.
“We’ve expanded the number and focus of lenders and are simplifying these processes. We expect to have most of these issues resolved by the end of the year – that should translate to growth in 2023.”
The volume of fixed rate lending through the bank had started to ease, he said.
“Fixed was around 39% of the flow for the half, reducing to 24% in March: this mix change has impacted margins,” Rowland said.
Margins fell 14 basis points over the half-year, with most of the margin fall occurring in the first quarter, he said. Lending spreads were down 15 basis points.
“We grew fixed rate mortgage lending, while higher margin investor lending contracted. Competition has been intense in business, which has also seen reduced spread,” Rowland said.
Westpac Group expected the cash rate to rise to 1.75% by the end of 2022, moving to 2.25% in 2023.
“The rising rates will benefit earnings on capital, and non and low rate-sensitive deposits,” Rowland said.
As fixed rate home lending was repriced, mortgage borrowers shifted towards variable rates.
“There will be some impact of lower fixed rate margins in the second half, and we expect competition to shift to variable rate mortgages,” Rowland said.
Loans were assessed at higher rates – currently the higher of the customer rate (including any life-of-loan discounts), plus a serviceability buffer of 3%, or the ‘floor rate’, currently 5.05%.
Summarising the half-year results, Rowland, said progress on cost reset was a “standout.”
The bank’s balance sheet and capital were well-positioned for a changing outlook, and most of the bank’s credit metrics were stacked to pre-COVID levels, he said.
“Our capital ratios remain strong, after returning $5.5 billion to shareholders this half,” Rowland said.
Westpac Group expected the Australian economy to expand by 4.5% in 2022, slowing to 2.5% in 2023.
It is forecasting credit growth of 5.7% in 2022, slowing to 4.3% in 2023.
