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Westpac posts flat full-year profit of $7.82bn

Nicholas Grove  |  07 Nov 2016Text size  Decrease  Increase  |  

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Australia's oldest bank reports a flat cash profit for fiscal 2016 and cuts its ROE target after strengthening its balance sheet with additional capital.

 

Westpac Group (ASX: WBC) on Monday reported an underlying cash profit of $7.822 billion for fiscal 2016, unchanged on the previous year and in line with consensus expectations.

Statutory net profit fell 7 per cent year over year to $7.445 billion.

Cash earnings per share (EPS) fell 5 per cent on the prior year to 235.5 cents, the bank said in a statement to the ASX.

Lending and customer deposit growth grew 6 per cent and 9 per cent, respectively, Westpac said.

The bank said its cost-to-income ratio stood at 42 per cent, down 7 basis points, while net interest margin increased 5 basis points to 2.13 per cent.

Charges for bad debts rose 49 per cent to $1.1 billion, which was mainly attributable to the bank's institutional division.

Westpac declared a final fully franked dividend of 94 cents a share, flat on the previous corresponding period and taking total dividends for the year to 188 cents a share. The full-year payment was 1 cent higher than Morningstar's forecast.

The final dividend will be paid on 21 December 2016 to shareholders on the register as of 15 November 2016.

Morningstar head of Australian banking research David Ellis said there were no major surprises in the cash earnings result, which was just 2 per cent below his forecast.

And despite the rise in bad debts, Ellis said Westpac's asset quality remains "sound".

"Higher stressed assets primarily reflect a modest rise in mortgage delinquencies and from companies exposed to the mining and New Zealand dairy industries," he said.

The bank said a key feature of the result was the further significant strengthening of the balance sheet, with capital raised early in the year assisting to lift average ordinary equity by 13 per cent.

This contributed to the common equity tier 1 (CET1) capital ratio on an internationally comparable basis being in the top quartile of banks globally, Westpac said. The CET1 ratio stood at 9.5 per cent, down 2 basis points.

The bank said its funding and liquidity position had also significantly improved, with the deposit-to-loan ratio rising by 2 percentage points to 70.5 per cent.

However, this additional capital came at a cost to returns, Westpac said, leading to the reduction in return on equity (ROE) and lower EPS. Cash ROE stood at 14.0 per cent, down 185 basis points on the previous year.

Westpac CEO Brian Hartzer said the bank's current 15 per cent ROE target is no longer realistic given expectations that low interest rates will continue for some time, evolving regulations for capital and liquidity, and higher regulatory costs.

"Westpac believes in maintaining strong return disciplines and will be seeking to achieve a ROE in the range of 13 per cent to 14 per cent in the medium term," he said.

Morningstar's Ellis said he was not surprised by the updated medium-term ROE target.

"We believe the new target is achievable and more realistically reflects the lower earnings growth environment and higher regulatory capital regime," he said.

Commenting on the results, Hartzer said the bank's Consumer and Business divisions performed strongly, with the former continuing to be the driver of the bank's growth.

"It expanded its customer base by 3 per cent and had strong home loan and deposit growth of 8 per cent and 7 per cent, respectively," he said.

"The Business Bank delivered solid growth in core earnings, with a 5 per cent rise in lending and a 9 per cent increase in deposits."

However, cash earnings from BT Financial Group fell 4 per cent year over year to $876 million on the back of the partial sale of BT Investment Management, a lower contribution from the Ascalon subsidiary, and higher regulatory costs.

Also, the Westpac Institutional Bank continued to face both structural and cyclical pressures, with cash earnings down 18 per cent due to a $215-million increase in write-downs, and reduced fee income from subdued lending and markets activity.

Westpac New Zealand's cash earnings fell 4 per cent to NZ$872 million after intense competition for new lending and a shift to lower-spread fixed-rate mortgages compressed margins.

Regardless, Hartzer was sanguine about the overall outlook for the local economy, with the bank's portfolio strongly positioned in its key markets of Australia and New Zealand.

And while he didn't provide any specific earnings guidance, Hartzer said the bank was "well placed to continue to deliver solid returns for shareholders".

Despite the challenges facing the bank, Ellis expects Westpac to deliver good lending and deposit growth in its core markets in Australia and New Zealand in fiscal 2017 following the strong momentum in fiscal 2016.

"We retain our positive view and rank Westpac as our preferred major bank exposure."

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Nicholas Grove is a Morningstar journalist.

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