Westpac bad loans climb, shares tank

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From Macquarie:

  • Cash profit missed consensus and our expectations; dividend in line: 1H16 cash profit came in at $3.904bn compared to MRE 1H16 estimate of $4.05bn and consensus of $4.03bn. DPS came in at 94cps, in line with MRE and consensus. The payout ratio of 80% looks elevated and difficult to sustain. WBC will utilize the DRP however no discount will be offered.
  • Operating revenue growth was in line with expectations: Revenue growth of 1.0% HoH was in line with MRE of 0.9%.
  • NIM increased 3bps to 2.14% from 2.11% in 2H15; we were anticipating a 2bp increase. This was driven by improved deposit spreads on TDs, online and savings accounts, which added 3bps to the margin. Asset spreads were flat, which was a disappointment given the implied ~10bp uplift from mortgage repricing this half.
  • Asset growth was in line with expectations, with 3.0% HoH growth compared to MRE expectations of 2.8%. The main contributors to growth were Australian housing (4%), Australian business (2%) and NZ (3%).
  • Non NII was weak with -7.7% HoH growth, more subdued than our forecast of -3.6% HoH growth driven by several infrequent items including the sale of BTIM and no Hastings performance fees. Excluding these items, Non-NII declined 1% due to lower cards income and lower WIB fees.
  • Cost growth missed MRE at 0.9% HoH; WBC has increased guidance to +3% cost growth for FY16: Cost growth of 0.9% HoH was elevated vs. MRE of -0.2% HoH driven by investment in the business and higher occupancy expenses. WBC expects expense growth to be above 3% for FY16, with higher costs of restructuring and increased regulatory spend driving the increase. The cost to income ratio came in at 41.6%, flat from 2H15. WBC continues to target a sub 40% cost to income ratio by FY18.
  • Impairment missed expectations driven by 4 large exposures in WIB: BDD expense came in at 21bps (impairment/GLAA) in 1H16, above MRE of 16bps and 8bps up on 2H15. This miss was principally driven by 4 large exposures within the Institutional division that added $252m to provisions. Impaired assets and 90dpd and were both up by 6bps and 3bps, respectively, with watchlist/substandard loans down 5bps, seemingly due to transfers to impaired. WBC expects asset quality to remain sound in 2H16 with the charge expected to be lower than the 1H16 level.
  • Organic capital generation was a bit soft, influenced by RWA growth: WBC CET1 ratio is currently 10.47%, boosted by the recent capital raising (96bps) but slightly below our expectations for 10.58%. Excluding the impact of mortgage risk weights, WBC’s pro-forma CET1 ratio is currently ~9.3%. Organic capital generation for the half was ~14bps, with a 22bps drag from RWA growth.
  • Divisional commentary: Consumer bank saw cash earnings growth of 5% HoH, with growth in core earnings partially offset by an increase in impairment charges (higher consumer delinquencies). Business bank saw 3% HoH growth in cash earnings aided by a 1bp increase in margins. Institutional Bank was the main driver of the miss, with pre-provision earnings down 4% HoH from weaker margins and cash earnings down 25% HoH from a material increase in the impairment expense.

Down -4% with other banks hammered too.

About the author
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal. He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.