Westpac has joined the banking reality club, along with charter member, ANZ.
They will be joined later this morning by the National Australia Bank when it releases its profit for the six months to March 31.
Westpac’s interim result was not all that good, despite a rise in dividend and as we warned in Air more than a month ago, the outlook for our banks is for several years of tough trading conditions.
Those have clearly arrived and it has only been the continued improvement in bad debt provisions that has allowed the banks to report higher earnings and payouts to shareholders.
First-half cash profit rose 7% to $3.17 billion for the six months to March 31, as bad debts fell sharply and the company lent more money for housing.
Including a $1.1 billion reduction in tax related to its 2008 St. George Bank purchase, Westpac’s net profit rose 38% to $3.96 billion, but that missed the $4.13 billion median estimate of analysts.
Interim dividend was boosted 17% to 76c a share (after the ANZ lifted its interim by 23% to 64c a share on Tuesday).
Investors reacted by selling down the shares.
They ended the day off 62c, or 2.5%, at $24.11.
It pointed to a “broadly supportive” operating environment given low rates of unemployment and strong intentions for capital expenditure among business.
"As a result, business credit growth is likely to recover, although the timing remains uncertain," Westpac said.
The real driver behind the improvement was a 47% fall in impairment (bad debt) charges down to $463 million.
Westpac said operating income of $8.501 billion was 1% lower than First Half 2010, due principally to strong markets income in the prior corresponding period not being repeated.
"Pleasingly, operating income was 2% higher than Second Half 2010,” the bank said in yesterday’s statement.
"Lending increased $10 billion or 2% over the year to 31 March 2011. Australian mortgages were the key contributor to the increase, rising $18 billion or 6%.
"This growth was partially offset by a $6 billion reduction in Australian business lending from the continued de-leveraging of corporate Australia and a run-down in commercial property exposures."
Over the last six months, business lending balances were largely unchanged.
Customer deposits increased $17 billion over the year more than fully funding loan growth. the bank said.
And while lending and deposits increased, net interest margins were five basis points lower compared to First Half 2010 as higher funding costs continue to flow through.
As a result, net interest income was 1% lower.
Recent trends have been positive with net interest income rising 2% compared to Second Half 2010 supported by a four basis point rise in net interest margins.
Non-interest income was a little lower than First Half 2010, down $41 million or 2%, principally due to a $156 million reduction in trading income.
Fees and commissions income was higher, as was Wealth management and insurance income.
However, natural disasters in the period resulted in increased insurance claims.
The bank said its expenses were well managed over the year, rising just 2%. Compared to Second Half 2010 expenses were 1% lower.
The reduction in expenses reflects the strong progress achieved with the bank’s productivity program over the half and the timing of project spending.
More than 11 jobs have been cut in retail and the St George Bank, without too much noise.
Westpac’s core business, the retail and corporate banking divisions lifted profit 7% to $936 million, while there was a 5% fall to $767 million in the earnings in the institutional bank which lends to big business.
St George Bank business revealed a 23% rise in profit to $582 million.
The earnings lift was helped by a 4% rise in earnings from its Adelaide-based BankSA unit to $166 million.
Westpac’s wealth arm delivered a modest 3% improvement in profit to $309 million.
Westpac’s New Zealand unit posted a 68% increase in profit when measured in local currency terms.
