Westpac has joined rivals the Commonwealth and National Australia Bank (as well as the regional Bendigo and Adelaide) in reporting a solid recovery in earnings, thanks to the improving economic outlook.
Westpac said in a December quarter update on Wednesday that profits bounced back strongly in the December quarter to $2 billion.
The bank said earnings had benefited from lower bad debt charges, wider margins, and lower expenses due to short-term changes in its investment spending.
CEO Peter King said in the statement to the ASX that the economy is on the mend and predicted a strong year in the mortgage market.
Unaudited cash earnings excluding notable items rose 54% to $2 billion, from the quarterly average for the September half. Westpac doesn’t do regular December quarter updates (indeed it said on Wednesday this would be the last), so the comparison is not strictly comparable to the NAB and Commonwealth.
CEO Peter King said most of the improvement in profit was caused by lower charges for impaired loans and improving credit quality. Profits were also boosted by a $501 million impairment benefit.
“While uncertainty remains around the impact of local COVID outbreaks, there is cause for optimism,” Mr King said. “The economy is recovering, consumer and business confidence is strong, and the labour market has been much more resilient than expected. At the end of December there were 12.9 million employed Australians compared to 13 million in March 2020.“
“We are also beginning to improve momentum in mortgages and while the [loan] book was little changed over the half, we have processed a significant increase in applications. Low interest rates, rising house prices, new construction, and high consumer confidence all point to continued recovery in home lending activity in 2021,” he said in the ASX statement.
Westpac also lifted its economic outlook assumptions, and it said this contributed 55% of the fall in bad debt provisions.
While in September it was previously expecting a small fall in house prices this year, it is now forecasting a 4% rise in prices in 2021, followed by a 10% gain next year.
Westpac said it had not changed its bad debt provisions for at-risk sectors of the economy, but the proportion of stressed loans fell 15 basis points to 1.76% of its portfolio.
Mortgage delinquencies also fell in the quarter by 16 basis points to 1.46% of the portfolio, as the bank reported an ongoing decline in the number of customers who had deferred their repayments.
The bank said 76% of customers who took out a deferral last year had returned to making repayments, and it expected a “significant roll off” in February and March.
That matches the experience of other banks.
Westpac is well capitalised – its common equity tier 1 capital was 11.9% of risk-weighted assets, well ahead of the 10.5% level required by regulators but less than the high 12.5% of the Commonwealth.
