With Westpac delivering its third quarter update yesterday a couple of points emerge strongly.
All four (Westpac, the NAB, ANZ and Commonwealth) remain under pressure from sluggish local demand for money, higher cost of refunding and are facing tougher times ahead.
If this is the story in a year’s time, rate rise or no rate rise, you’d be right in questioning the sustainability of current projections for rising dividends.
The major reasons for the improved profits is the fall in bad debts, especially among the big end businesses that fell over in the GFC.
But there’s another less obvious factor.
The worst performing big banks were those which used the GFC and slowdown to expand in the Australian market.
The other big banks, the CBA (which bought Bankwest), Westpac (which acquired St George) and NAB (which bought Aviva’s local funds management and insurance operations and has pursued AXA), all did relatively badly compared to each other.
Perhaps the best placed bank, according to analysts, is the ANZ, which has ignored local mergers and acquisitions (It may have been lucky if, as reported, it missed out on buying Suncorp Metway in late 2008) and invested in an Asian expansion which is now emerging as a future earnings stream.
Ignore the $6.1 billion full year profit from the CBA, its property loan problems from Bank West have been a real hindrance, likewise Westpac with its St George purchase.
NAB incurred higher costs from its acquisitions and so far the contribution from Aviva hasn’t been apparent.
These points come to mind after Westpac’s third quarter update was released yesterday.
Westpac’s third-quarter cash profit rose 27% to $1.4 billion, helped by the expected sharp fall in the level of bad debts, but the total fell shy of analysts’ targets for a result of $1.5 billion.
The result was up from $1.1 billion earned in the same quarter of 2009.
That may have been overly optimistic on the part of the analysts, but the market result was that the shares fell 2.4% at the opening to a low of $22.05 before recovering to end at $22.07, down 58c or 2.5%.
Like its peers, Westpac said that while the Australian economy remained robust, the operating environment was challenging, given signs of slowing US growth and on-going problems in Europe.
The ANZ last week said third-quarter profit rose 37% to $1.3 billion, helped by the drop in bad debts. National Australia Bank meanwhile reported a 22% rise in third-quarter cash earnings to $1.1 billion.
The CBA had a 42% jump in full-year profit to $6.1 billion, but it felt revenue growth and interest margins reverse during the second half and was very cautious about the outlook as a result.
In its statement, Westpac reported that besides the rise in cash earnings, the other highlights included:
Stabilised asset quality leading to a further easing in impairment charges to around $300 million for the June 2010 quarter compared to an average of $440 million for the previous two quarters and an average of around $800m per quarter in 2009.
Lending an additional $7 billion to households and small businesses and a $4 billion increase in customer deposits.
A net interest margin for the quarter of 2.17%, down 2bps from the March 2010 quarter.
Total revenues about 1% lower than the previous quarter, with lower Treasury and Markets income. Other WIB income and income from other Group items were also lower. Westpac Retail and Business Banking and St. George revenues were slightly higher in the quarter.
A secure funding position with $40 billion in term wholesale funding raised this financial year to date, completing our wholesale funding needs for the year.
