Yesterday’s fear-driven sell-off locally followed overseas leads, so it was natural that banks and other groups exposed to risk should be sold off as well.
That made assessing the market’s reaction to Westpac’s mixed interim report, a little harder than usual.
The shares opened higher at $26.59, rose 20c to a high of $26.79, then fell away to trade at $26.19 at the close after hitting a day’s low of $26.17.
The loss from Tuesday was $1.14, or 4.2%, the sharpest fall in 10 months.
That was more than the overall 1.3% fall in the market, so on that basis you’d have to assume there was some disappointment at a result that on the headline basis of a rise of 32.7% and higher dividend, was OK.
But as always the reasons for the markets disappointment were to be found among the details in the hundreds of pages of graphs, commentary and bullet points.
Cash profit for the March quarter was a record $2.983 billion, but like the ANZ last week, much of the improvement came from lower provisions, thanks to the improving economy and lower bad debts among consumers and business.
Westpac reported a $732 million drop in provisions for impaired loans and assets and that had a big impact on the profit and loss account.
The improvement in provisions helped produce a turnaround in Westpac’s institutional business.
But that was overshadowed by a poor result from Westpac’s heartland, its retail banking business, where, despite boosting sales of new mortgages at nearly twice the rate of the overall market, earnings fell 12% to $873 million from the first quarter of 2009.
That surprised investors and some analysts.
Westpac blamed the higher cost of wholesale funding and battle for deposits for crimping interest margins. Retail earnings were also down 5% from the September second half year period.
The contribution from St George Bank was also down.
That fell $100 million to $472 million from last March while its half-on-half contribution from the second half last year was flat.
Westpac bought St George for a boost, not to contribute a flat result in the second year of the merger.
But the board lifted the payout, saying, "Given the improved earnings, an interim dividend of 65 cents per share has been declared by the Board.
"The dividend is fully franked. This represents an increase of 16% over the dividend declared for the half year ended 31 March 2009 and a pay-out ratio of 66.7%.
"In considering the interim dividend, the Board took into account that there still remains a degree of uncertainty over future bank regulatory requirements.
"Against this backdrop we have strengthened our capital position and delivered a good financial performance supported by strong volume growth in loans and deposits."
Investors were unhappy with the constricted interest margins, after all the smaller ANZ managed to expand its net interest margin in the same half year.
Westpac’s net interest margin fell 11 basis points (0.11%) for the half to 2.28%, from the second half of 2009.
The more accurate and correct comparison is from the first half of 2009 and the increase was just 4 bp, small, but an increase.
But it was better than that. Westpac’s investor discussion pack explained "Customer related net interest income up 3.5% and 3.4% over each of the last 2 halves".
With housing finance approvals solid, but not expected to show much growth, but with business lending starting to grow, Westpac might be able to catch the wave.
It’s big in housing and has a sizeable business balance sheet, but the NAB and ANZ are bigger and more focused in this area.
Higher interest rates though will dominate Westpac and the entire sector for the coming six months to a year.
