Westpac shares dive despite unveiling 35b buyback

By Clancy YeatesUpdated November 1, 2021 â€" 12.26pmfirst published at 8.04am

Disappointing financial results from Westpac have sparked a sharp slide in the banking giant’s share price, after its full-year profits were marred by rising costs and a squeeze on profit margins.

Westpac on Monday reported full-year cash earnings rose 105 per cent to $5.35 billion due to cuts to its bad debt charges, as it also launched a $3.5 billion share buyback and raised its final dividend from pandemic-affected levels of last year.

Westpac chief Peter King said it had been another challenging year for the bank, but it was making progress in simplifying the business, and credit quality had been “remarkably good.” Credit:Jessica Hromas

However, the numbers were weaker than many expected, and the market reacted savagely to a jump in expenses and a decline in the bank’s net interest margin, as it is forced to compete on price to retain its market share in mortgages. Some analysts had also been expecting a bigger buyback of up to $5 billion.

In early trading Westpac shares had slumped 5.8 per cent to $24.17, which analysts said was mainly due to pressure on the bank’s costs.

While Westpac appears to be turning around new lending its flagship home loan business, the bank’s costs shot up by 9 per cent in the half, excluding notable items.

Chief executive Peter King maintained said 2021 had been another challenging year for the bank, but it was making progress in simplifying the business, costs would fall in 2022, and credit quality had been “remarkably good.”

“A turnaround in impairment charges and lower notable items were the main drivers of our improved earnings, while we also restored growth in mortgages and have begun to see better momentum in our institutional and business portfolios,” Mr King said.

“While notable items were lower, they remain elevated as we continue to work on fixing our issues and simplifying our business,” he said.

Westpac is regarded as a laggard by many in the market, after the more than 200-year-old bank was rocked by a 2019 money laundering compliance scandal that sparked a management clean-out, higher costs, and widespread change in the organisation.

Mr King has previously vowed to slash more than $2 billion in costs to deal with the crunch on its profitability, but analysts were unimpressed with the expenses announced on Monday.

Westpac’s flagship home loan business has also been struggling, but Mr King said it was making progress in turning it around, with 3 per cent growth in its mortgage portfolio over the year, an improvement on last year.Credit:Darrian Traynor

Macquarie analyst Victor German said an increase of about $460 million in expenses during the second half was the key area of disappointment in the result. He said the overall result looked “highly challenging” but the critical question was whether the period of profits “rebasing” to a lower level had ended.

“While we see scope for medium-term recovery, in the short term, we remain cautious as the stock is likely to respond to consensus downgrades,” Mr German said.

Westpac’s flagship home loan business has been struggling to maintain its market share, but the results showed signs of a turnaround, with 3 per cent growth in its mortgage portfolio over the year and a strong lift in new lending in the second half.

The recovery in mortgage lending, however, was accompanied by pressure on profit margins, which Mr King said would continue.

Net interest margins, which reflect funding costs compared with what banks charge for loans, fell 4 basis points to 2.04 per cent.

Morningstar analyst Nathan Zaia said the bank needed to compete on price to hold its market share, but its margins may come under further pressure in the year ahead.

”It looks like in home lending they are starting to do a bit better, but the question mark is how much of that is coming at the expense of margin?” he said.

Its profit received a $590 million boost from cuts to provisions for bad debts, in stark contrast to last year, when it took charges of more than $3 billion for soured loans.

On the economy, a critical influence on bank profits, Mr King predicted growth would rebound over the year ahead as NSW and Victoria re-opened up from lockdowns and households dipped into large savings balances.

“Consumer spending will likely increase significantly as states re-open and pent-up demand is released, particularly supported by consumer optimism and sizeable savings,” he said.

As regulators seek to dampen the red-hot property market through curbs on mortgage lending, Mr King added the bank expected house prices to rise further next year, albeit at a slower pace.

Share this post