The Westpac canary

The latest results profit result for Westpac shouldn’t be a surprise for anyone who reads Macrobusiness on a daily basis.

Westpac has recorded a two per cent fall in third-quarter profit amid a “subdued” operating environment, the bank reports.

Reported net profit for the three months to June 30 were $1.45 billion.

“The June quarter 2011 saw the operating environment become more subdued with consumers increasingly cautious and larger businesses continuing to de-leverage,” Westpac chief executive Gail Kelly said today.

“This was reflected in slowing system credit growth in the quarter, and weaker markets,” Mrs Kelly said.

The net interest margin of 2.12 per cent was up four basis points from the first half’s figure of 2.08 per cent, after excluding volatile and one-off items, Westpac said.

Stressed assets fell to 2.67 per cent of committed exposures at June 30, down from 2.85 per cent at the end of the March quarter.

Westpac said impairment charges were higher in the third quarter at around $300 million, but this represented “little change” from the average of the first two quarters after excluding the First Half 2011 changes in economic overlay provisions.

“Across divisions, impairment charges improved in the Institutional Bank and in New Zealand while charges were higher in Westpac RBB and St George,” Westpac said.

Mortgage delinquencies of 90 days or longer increased to 59 basis points at June 30, up three bps in the quarter, although 30-plus days delinquencies were 17 bps lower, reflecting in part an easing of the disruption borrowers felt from natural disasters.

Mrs Kelly said the group’s third quarter performance was “a sound outcome in a subdued operating environment”.

The third quarter 2011 result reflected a rise in operating income of around 1.5 per cent, flat expenses and higher impairment charges.

Falling profits are to be expected in a subdued credit issuance market and my expectation is that we have more to come. Gail Kelly is once again talking down provisioning issues, but my readers would be aware that the banks have already kicked up their previous profits by lowering bad debt provisions. That game is obviously up and it is now time for the shareholders to realise the losses.

The details of the Quarterly result were:

  • $1.55 billion cash profit for the quarter, up 11 per cent from a year ago, but lower than the average of the previous 2 Qtrs of $1.59 billion for each of the preceding two quarters.
  • Impairment costs of about $300 million for the quarter.
  • Revenue by 1.5 per cent, helped by some widening of lending margins
  • Net interest margin was up about 4 basis points
  • Total lending across all sectors increased 1 per cent
  • Deposits up $2.4 billion for Qtr.
  • Mortgage delinquencies of 90 days or longer increased to 59 basis points
  • Mortgage delinquencies of 30 plus days were 17 basis points lower

Also as important was what Gail Kelly announced just after the quarterly report.

Westpac will join the growing number of Australian companies to cut back on jobs as part of efforts to reduce costs in the face of a slowing economy.

Chief executive Gail Kelly, though, remains coy in terms of the number of staff likely to be axed, saying a number of “moving pieces” to the project means the bank is yet to settle on a specific figure.

“Net, I would say staff will come down somewhat over the year we are in, and will come down somewhat over next year, but there are quite a few moving pieces

Most at risk in terms of jobs are those related to technology projects as the bank seeks to boost efficiency. Mrs Kelly also put back on the agenda the outsourcing of technology jobs offshore as another area to find savings.
That certainly suggests to me that Westpac do not see the trend in credit issuance changing any time soon.

While trying not be too alarmist as these are still decent profits, I must admit that this latest announcement has me on watch for all of the concerns that I have been discussing over the last few months. The fall in profit by a major bank and their intention to shed staff, signals to me that the deflationary cycle is being baked in and therefore all of the risks I have previously identified while analysing statements by the RBA are now in play:

  1. Falling credit growth – tick
  2. Falling asset prices – tick
  3. Bottoming employment  – tick
  4. Falling bank profits – tick
  5. Sudden rise in mortgage arrears – watching and waiting.

Why is it I get the feeling that Ian Narev has just been handed an un-polishable turd.

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  1. I expect Narev will be keen to stamp his authority on CBA and wield an axe throughout the “un-polishable turd” at some stage.

    Banks the world over are cutting back on staff levels, what makes Australia so different? I envisage I will be looking elsewhere for employment within a year.

  2. Good overview. No doubt there will be interesting times ahead for the banks.

    But dash, there are growing calls to ‘massively tax the miners’ due to profits (and to be fair only the majors are really in the big-time) – a similar argument could be made that Banks, which are in a comparatively privileged operating environment in terms of government ‘assistance’, have done very well thank you very much and their profits also fall in this ‘super’ league and should be taxed similarly to the miners… unfortunately looks like that possibility is about to go down the gurgler.

    Nonetheless, $1.45b net profit for a three month period, sounds pretty super to me…

  3. Worst part about all of this is I want to buy some land with my fiance but it never seems to be the right time to do it anymore…

    Might go try screw down the developers on price – wish me luck

  4. For the life of me, why arent people talking about the implications of Q2 GDP being negative and Australia having its first recession in 20 years???? Anybody, Anybody?

    • Sorry, Obviously this release is on the 7th Sept. More on the implications IF it happens. Might be time for a write up D.E????

  5. Sandgroper Sceptic

    Narev can do what every other new CEO does. Announce massive impairments as things are far worse than expected (same as a new government), this gives him a cushion for a few quarters. I doubt it would be enough but could give Narev some breathing space.

  6. Jumping Jack Flash

    So what happens if the banks aren’t turning record profits forever?

    I think those rating agencies will be ready for swooping.

  7. CBA had nothing but an increase in profit when it announced its most up to date report a few days ago.

    Why are we comparing WBC with CBA? Their comparative results speak for themselves.

    Though I’m sure women are just as good as men in leadership roles…..

  8. DE, thanks, and yes no surprise. But MSM will be … Much worse can happen now given the housing situation. I see the government are trying to blame Abbot.

  9. The macro background to deflationary conditions is:
    M1 held at 4% total for 2 years in an economy with some growth,inflation of 3+ and relatively high population growth (however M1 in last reported month went to 4% in one month)

    Interest rates for borrowers at least twice the rate of comparable countries

    A$ at least 40% overvalued against the trade currency the USD on a PPP basis

    Overvalued assets particularly residential property held up by the govt policies and the tax system

    Is it any wonder deflationary forces have asserted themselves but there is a lag but now coming into full play?

  10. Interesting that a bank at first job cuts looks to its technology staff first to cut. Aren’t banks really just technology mainly now? Its surprisingly that the first thing they cut are probably the only staff in the financial sector actually producing something.

    Always the bankers it seems that are the last to go.

  11. Westpac is losing favour with their uncompetitive Visa card rewards so in one year they are really open to a drop in their best customers.
    The moves by Citi ,Woolworths/HSBC,BankWest and others are putting Westpac at risk of substantial customer migration while Gail Kelly does nothing but smile.
    Westpac business managers have a low opinion of Westpac cards.