Westpac Banking Corporation : Westpac Reports Record Cash Earnings Amid Subdued Market
05/02/2012| 10:26pm US/Eastern
--Westpac reports second-straight 1H cash-earnings record
--Net profit slumps 25% from year earlier
--Westpac to report interest-rate decision on Friday
(Adds breakdown of divisional results and analyst comment.)
By Caroline Henshaw
Australia's Westpac Banking Corp. (WBC.AU) reported record first-half cash earnings for the second time in a row, even as the lender struggled to preserve profit margins amid slowing loan growth and higher funding costs.
Australia's second-largest bank by market value said first-half net profit slumped 25% to A$2.97 billion from A$3.96 billion in the six months to Mar. 31, 2011 following a one-off tax consolidation from its St. George acquisition that boosted last year's profit.
However, cash earnings--a closely-watched measure excluding one-offs and non-cash accounting items--rose 1% to an unprecedented A$3.12 billion, slightly above the consensus analyst forecast of A$3.11 billion. Operating income rose 5% over the period, just outstripping a 4% gain in expenses, Sydney-based Westpac said. Lending increased 5% over the year, half of the 10-year average of more than 10%, while deposits grew 11%.
"This is a sound result in a challenging environment and reflects continued progress in building a stronger and more productive organisation," Chief Executive Gail Kelly said in a statement.
She added: "There has been a shift in the culture of our organization to be more of a deposit-raising culture than a lending culture," as Australians deleverage their own lending in a gloomy economic environment.
Westpac's retail and business bank was the key driver of growth for the group, with cash earnings up 14% on the year to A$1.05 billion, despite muted growth in demand for bank lending. The bank's New Zealand unit grew earnings 24% to A$333 million, while institutional-bank profits crept up by 1% to A$663 million.
BT Financial Group--Westpac's wealth-management arm--posted the biggest loss, with profit down 14% to A$294 million, while the recently-acquired St. George brand saw cash earnings fall 5% as the group reeled back exposure to third-party mortgage lending, Westpac said in a statement.
"Overall, the pre-provision operative profit looks better than our expectations, and repricing benefits should aid the remainder of fiscal 2012," said Goldman Sachs analyst Ben Koo.
Westpac shares, the second-best performing of Australia's major lenders this year, rose 1.2% in early trading to A$22.96 on the consensus-beating result against a largely flat market.
Macquarie maintained its recommendation on the stock at Outperform, adding that better cost controls and improving margins should create "reasonable tailwinds into the second half of fiscal 2012."
Still, the record result will add to pressure on Westpac to follow rivals Commonwealth Bank of Australia (CBA.AU) and National Australia Bank (NAB.AU), both of which passed on part of the Reserve Bank of Australia's 50-basis-point interest-rate cut this week.
CBA said on Thursday that it would slash its home loan rates by 40 basis points, outstripping the 32-basis-point cut from NAB announced Wednesday. Kelly said Westpac would reveal its decision on rates on Friday, and that the lender had managed to claw back market share of mortgages from its rivals to around 23%.
Like its peers, Westpac has struggled to maintain profit margins since the global financial crisis because banks have boosted their deposit interest rates in a bid to gain more customers.
Westpac's net interest margin fell 4 basis points from a year ago to 2.17%, while net interest income increased by A$259 million to A$6.223 billion--as a 6% rise in average interest earning assets partially offset the decline in margins.
"The margins pressures have become a bit stronger in the second quarter of this half," Kelly told journalists at a briefing, adding that the biggest factor in pressuring margins had been the "price of retail deposits" rather than the cost of wholesale funding of the RBA's cash rate.
In the long-term, however, Kelly said the banks are likely to see subdued operating conditions. Westpac's return on equity for the first half was 15.1%, and Kelly said she doesn't expect that measure to return to pre-crisis levels of above 19% any time soon.
The company declared a fully-franked dividend of 82 cents a share, up 2 cents from last year.
"The strength of our position means that about three-quarters of our profit can be returned as dividends to our shareholders," Kelly said in a statement to the Australian Stock Exchange.
-By Caroline Henshaw, Dow Jones Newswires; 61-2-8272-4689; firstname.lastname@example.org