Investors were not fooled by Westpac’s improvement in yesterday’s half year report as it reported small rises in revenue, earnings and dividend.
The bank’s shares fell more than 4% yesterday at one stage as the report got a big thumbs down from investors because of more substantial moves in other figures in the accounts, especially the rise in bad debts (one of which is Slater and Gordon which yesterday revealed a deal with its banks which prevented its collapse).
As a result of the weak reception for Westpac’s report, other bank shares also sold off and the ASX 200 lost 50 points, with investors also nervy about this morning’s ANZ half year report (see separate story).
Westpac lifted interim dividend 1 cent to 94 cents after reporting a 3% rise in cash earnings to $3.9 billion, on a 5% rise in revenue to $10.4 billion. The net interest margin rose, the cost to income ratio fell, but bad impaired assets jumped sharply from the March 2015 half year – in fact it nearly doubled at a 96% surge.
As a result by the close, Westpac shares were down 3.5%, CBA shares lost 2.1%, NAB, 2%, and ANZ 2.2%. Bank of Queensland shares fell 2.3% and Macquarie Group lost 1.6%. All were down more during trading – Westpac more than 4.2%.
In fact Westpac’s fall of 3.5% in effect was the difference between the ASX 200 recovering from the steep early morning fall and the final 9 point loss as the market rallied in the afternoon.
Not helping confidence in the banks was a gloomy tinge to Westpac’s outlook for the next six months from senior management yesterday.
Westpac expects more consumer loans to turn bad in the second half, but tried to assure investors that the problems are largely contained in areas reliant on the resources industry.
CEO Brian Hartzer said he expects a slight moderation in credit and deposit growth through 2016 due to slowing activity in housing and tightening credit standards. But he doesn’t see this as a major concern and said in commentary yesterday, “We think asset quality will remain sound overall".
Investors were disappointed by the rise in bad debts of 96% in the March six months (half year on half year). This was due to the institutional bank being hit by “significantly higher” impairment charges due to the bank’s exposures to four big customers which added $252 million to the bad debt charge. Slater and Gordon, Arrium, McAleese and Peabody Energy are believed to be among the four.
New individually assessed provisions were $471 million, larger than the market was expecting. All up the impaired assets provision jumped by $667 million in the latest half year, the highest in six years. That was at the core of yesterday’s sell-off.
"While there have been a small number of large firms experiencing difficulties during the first half, these have been predominantly due to company specific issues that have been, in some cases, exacerbated by the mining cycle," Mr Hartzer said.
"Company balance sheets are generally in good shape – having used lower interest rates to pay down debt – and levels of stress remain low.
"We expect some increase in consumer delinquencies over the second half, but this is likely to be concentrated in segments and sectors that are more reliant on the resources industry,.
"In this environment, and with the significant strengthening of our balance sheet, we will continue to manage the group in a disciplined way,” Mr Hartzer said.
Westpac said exposures in the agriculture sector had risen, with 0.48% of the book impaired, mainly due to the dairy industry problems in New Zealand.
The quality of the commercial property book improved. The proportion of the commercial property (a major source of bank problems) portfolio impaired fell from 0.64% in the second half of 2015 to 0.54% in this first half.
Stress in the mining (including oil and gas) sector rose. Impaired loans now represent 1.26% of portfolio, up from 0.28% in the second half of last year, which Westpac said was “driven by a small number of downgrades and reduction in the portfolio”.
Mr Hartzer said while the higher-than-expected Australian dollar "represents some risks on the export front, other aspects of the Australian economy are encouraging".
"The recent firming of commodity prices, solid employment growth – particularly in the services sectors – and ongoing low interest rates all support that outlook.
"The main threat we see is from global factors, which create fragility in businesses and regions that are more dependent on mining and mining construction.”We also see signs of moderating housing investment, although housing fundamentals remain in good shape,” Mr Hartzer said.
