Investors liked the flat annual result from Westpac yesterday and didn’t take too much notice of the mixed outlook (while many commentators and business media focused on it).
Westpac shares rose half a percent to $26.65, while the wider market fell half a percent under the influence of weak leads from Asian markets and a fall in local healthcare stocks.
Investors liked the fact that Westpac matched rivals ANZ and NAB in not inflicting direct financial pain on shareholders in the wake of the banking and finance royal commission by leaving final and full year dividends unchanged.
The country’s second-biggest bank said that it would pay an unchanged final of 94 cents a share making for a steady $1.88 cents full-year payout to shareholders.
The dividend came decision came after the bank declared a steady cash profit for 2017-18 of $8.065 billion and a 1% rise in the statutory result to $8.095 billion. That was struck on revenue of $22.18 billion for the year, up 2%.
The best sign of the bank’s strength was a 2 points rise in its net interest margin to 2.01% (a one-point rise to 2% excluding its treasury operations).
The Westpac results, like those from the ANZ and NAB last week confirmed the country’s big banks are enormously resilient and will survive the outcome of the royal commission and its recommendations.
They know that 2019 and beyond could be tough if the ALP wins the 2019 federal election, but there could be some sunshine in that with an acceleration in home lending and share buying if the ALP commits to its policies on cutting back benefits for investors in housing and shares.
Westpac CEO, Brian Hartzer said in a release with the results:
“While the economic environment remains supportive, this result reflects the tough operating conditions for banks, with higher regulatory, compliance, and funding costs, and increased competitive pressure, particularly in the second half.
In addition, provisions for customer refunds and related costs, along with legal costs, were $281 million after tax (equivalent to 3.5% of cash earnings) as we continued to work through regulatory investigations, remediations, and putting things right for customers.
“In response to these challenges, we’ve lifted productivity savings 16% to $304 million over the year (so those savings effectively paid for the costs associated with the royal commission.
Mr. Hartzer says Westpac doesn’t see any move in interest rates in 2019, expects home lending to slow to around 4% (which was the growth of Westpac’s lending in 2017-18) and sees no problems in its mortgage book.
“Westpac’s mortgage book remains fundamentally sound, with around 70% of Australian customers ahead on repayments and 90-day delinquencies remaining low.”
There were big positives – a massive $989 million extra (up 6%) in net interest income for the full year (and more to come from the increase in variable home loan rates in September).
“Reported net interest margin increased 7 basis points to 2.13%, reflecting increased spreads on certain Australian mortgages, a rise in Treasury income and contribution from fair value gains on economic hedges and higher deposit spreads. These increases were partially offset by the full period impact of the Bank Levy which was effective from July 2017. Wholesale funding costs were little changed, as short-term funding costs increased while long-term funding costs decreased,” Westpac said.
“Non-interest income fell $658 million or 10% compared to Full Year 2017 primarily due to a decrease in trading income of $257 million, the non-repeat of a large gain of $279 million on disposal of an associate in 2016-17, a revaluation loss of $104 million on the Pendal investment in Full Year 2018, and additional provisions for estimated customer refunds and payments recorded as negative income. These items were partly offset by income related to the exit of the Hastings business ($135 million).
“Operating expenses increased $258 million or 3% compared to Full Year 2017. The rise included annual salary increases, higher technology expenses related to the Group’s investment program, and an increase in regulatory and compliance costs and costs associated with the exit of the Hastings business. These increases were partially offset by productivity benefits and lower amortisation of intangibles.
“Impairment charges were $143 million or 17% lower compared to Full Year 2017. Asset quality remained sound, with stressed exposures as a percentage of total committed exposures at 1.08%, up 3 basis points over the year.”
That is a summary of a bak with a powerful balance sheet and a solid profit and loss account.
