There is mounting evidence that not all is well at MegaBank, with the Westpac (WBC) division announcing a slip in its profit in its quarterly update this morning as the earnings vice handle is squeezed a notch tighter.
Here are the headline details, the devil after:
- cash earnings for 3 months to 31 December 2011 was approx. $1.5 billion or 3.2% lower
- impairment charges slightly up at $300 million, stressed assets trending lower
- lending increased 1% in the quarter
- loan growth fully funded by $5 billion in customer deposits
- Net interest margin (NIM) dropped 10 basis points
- funding costs rose materially, mostly through higher deposit costs
- expenses were 2% higher, due to restructuring
The meme of higher funding costs hurting continues, with reduced NIM, like Commonwealth Bank yesterday, with more funding pressure coming from deposit competition, but again questions should be raised about underlying asset quality – the loan book.
Westpac released some details, explaining that stressed assets to exposure improved to 2.33%, down from 2.48% and over 3% from the second half of 2010. The explanation was clear:
“we continue to see consumers preferring to pay down debt.”
Combined with anaemic credit growth of 1% for the quarter, this is very telling.
Remember those “high” interest rates throughout 2010/2011 have now fallen, net of out of cycle bank increases, yet households are actually accelerating their pay down of debt? This goes counter to traditional theory of lower interest rates equating to more profligate spending and borrowing by households.
It seems prudence has returned to Australian households.
Finally on loan arrears, Westpac provided much more detail than CommBank’s obfuscated presentation yesterday:
By time, 90 day plus arrears were unchanged over the quarter at 0.55% of the book, whilst 30 day plus are ticking up with a 0.16% increase to 1.4% “largely due to seasonal factors”.
Although these remain at very low levels, structurally they are trending up. Something to watch very closely alongside today’s job numbers.
UPDATE: Westpac is down almost 3% at the open.