Westpac yesterday completed the September 30 balancing bank profit reports with yet another example of how financially strong our big four are.
The Commonwealth at June 30 started the trend with a rise in interest margins and strong rises in revenue and bank lending for home mortgages, plus a jump in interest income and the National, the ANZ and now Westpac have continued the trend.
All had big rises in bad and doubtful debts thanks to poor and doubtful lending decisions; all grew revenues faster than costs (except the ANZ which is financing a move into Asia), all have built on their dominance of the local economy and all fattened their interest margins for the first time in years.
So the latest news on higher bad and doubtful debt charges, a move that did frighten markets in May when the interim reports were issued, have this time been shrugged off as analysts and investors now wonder about the size of the coming rise in earnings.
A New Zealand tax judgment remains a concern for all four: collectively it’s around $1.9 billion.
Westpac has appealed its adverse funding and the possible huge payouts have been provided for and won’t have an impact on the earnings of the banks, except in an accounting sense.
All the banks have cut dividends and not given any real lead to shareholders about when they can expect their payments to be returned to former levels, except for Westpac, which has lifted its final (compared to its interim) in a sign that it might be a bit more confident than it seems from its commentary.
Underlying earnings were strong (that is profits before the impact of write-downs and bad loan provisions) over the year.
Westpac saw net profit down 11% to $3.4 billion.
But the real story can be seen from the following bald stats:
"Pro forma core earnings of $10.015 billion, up 19%, Pro-forma revenue of $16.755 billion was up 13%, Expense growth moderated over the year to 5%."
The cost to income ration fell to 43.3 cents in every dollar from around 47 cents because revenues grew much faster than costs.
Westpac lifted its net interest margin 0.31%, the best of the big three September 30 banks, up from 2.07% to 2.38%.
That 0.31% margin topped the ANZ’s 0.28% and the ANZ’s rise of 0.17%.
That means both Westpac and the ANZ managed to lift their margins by more than a normal Reserve Bank interest rate movement of 0.25%.
A $2 billion rise over the 12 months to September 30 took the amount set aside for, and doubtful debts for the full year, to $3.29 billion.
Westpac’s total provisioning now stands at $4.7 billion of which $500 million covers for the possibility of a general decline in its customers’ short-term ability to repay their loans (economic overlay is the jargon).
Cash earnings fell, down 8% to $4.6 billion.
Final dividend was fixed at 60 cents a share, making the total pay-out for the year of $1.16 a share.
That’s down 18% from the corresponding period a year ago. However, the group lifted its normal pay-out ratio as a share of net profits from 70% to 73%.
And there hangs another story.
A year ago Westpac actually lifted the final dividend 2 cents to 72 cents, after the collapse of Lehman Brothers and as the Australian and global economies slowed. The other banks were not as adventurous.
Yesterday Westpac announced a 60-cent final dividend – down 17% from last year’s final, but up 4 cents (7%), from the interim.
That increase was not justified by the second-half results with cash earnings effectively in line with the first half, so an increase in the payout ratio was required to make it.
But that tells us something about how the Westpac management and board view the outlook (and remember Westpac is more of a ‘stay at home bank’ compared with the NAB, ANZ and even the CBA with its small interests in Asia).
They are more than a bit confident the coming year will turn out to justify the increased payout level (and so must regulators, which like to be consulted at the moment on capital payments and dividend levels).
So as with the other big banks, the worst is behind Westpac and there are increasing profits to be had lending.
As with the NAB and ANZ results, Westpac’s story for 2009-10 is not about bad debt provisions and write-offs and lower profits.
It’s all about riding an economy that will be growing 2% faster than the federal government believed in May, and possibly more.
