Westpac has lifted its 2024 cost target to $8.6 billion from $8 billion after a surge in inflationary cost pressures in the six months to September 30.
The higher target seems to have been an attempt to switch investor attention by the bank from a fairly modest 2021-22 result.
Cash earnings of $5.3 billion were 1% lower than last year, weighed down by $1.3 billion in charges that it had previously announced, including a $1.1 billion loss on the sale of a life insurance business.
But, excluding those one-offs, Westpac said its core earnings were up 12%, and its net interest income had risen 7% as the rate rises for mortgages and other loans dropped to the income account. The market had been expected cash earnings of about $5.4 billion.
Westpac said it cut costs 7% in the year to September 30 “driven by our simplification program and a reduction in full-time equivalent employees of 2,667.”
“Given the impacts of higher inflation including wage increases from a tight labour market and continuing regulatory spend, we have revised our original FY24 cost target to $8.6bn,” the bank said on Monday. That target was originally $8 billion.
The bank is talking about operating costs, not costs associated with lending such as bad debts or asset impairments.
The chat in the comments from the bank for the full year result was all about the operating environment and confidence about the outlook for its core lending businesses.
“2022 has been a year of significant economic and geopolitical change. We are charting our way through a period of high inflation and rapid increases in interest rates. Russia’s invasion of Ukraine has disrupted energy and food markets, leading to higher energy costs for consumers and businesses. Floods in parts of Australia are also adding to inflationary pressures.
“We are not yet seeing increases in hardship or stressed assets. Many customers built up savings during the past two years and 68% remain ahead on their mortgage repayments.”
But the bank did warn that “it is inevitable that the impact of higher rates will be felt, including when borrowers’ low fixed-rate loans are rolled over.”
“As we approach the new year, there’s increased economic uncertainty and volatility in financial markets. Although supply chain constraints are easing, skilled labour remains hard to find. The biggest challenge for the authorities is to contain the high inflation psychology that is now taking hold in the economy.
“In Australia, consumer spending is resilient but as higher rates bite, we expect the heat to come out of the economy and inflation pressures to ease. Small business is one sector we are watching closely as consumption slows.
“Housing prices have fallen in recent months and this will continue into 2023. Credit growth is expected to ease. GDP growth will slow and unemployment will rise. These will be necessary outcomes if we are to lower inflation.
“The economy remains robust and Westpac is well positioned to handle the road ahead. Our own portfolio is in good shape going into 2023.”
“Many customers built up savings during the past two years and 68 per cent remain ahead on their mortgage repayments. However, it is inevitable that the impact of higher rates will be felt, including when borrowers’ low fixed-rate loans are rolled over,” CEO Philip King said.
The NAB releases its full year figures Wednesday morning. NAB shares eased 1.2% to $31.37, CBA shares edged up 0.03% to $103.08.
Westpac shares eased nearly 4% to $23.19. ANZ shares were down 4.5% to $24.33 but they went ex the 74-cent final dividend yesterday.
