Several things are working in favour of rising bank valuations favour now. The first is the steepening yield curve which always drives a bid for financials given it represents greater interest income for a borrow short, lend long business. The second is highlighted at Banking Day:
Westpac booked an impairment benefit of A$501 million in the December quarter, which helped it produce a net profit of $1.9 billion for the quarter – well ahead the quarterly average in the September half last financial year.
The bank said the impairment benefit was a result of the improved economic outlook and improved asset quality. It cut its expected credit loss provisions from $6.1 billion in September to $5.5 billion.
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The impairment charge, before other collectively assessed provision movements, was $134 million – down from a quarterly average of $287 million in the September half last year.
Westpac’s turnaround on impairments follows NAB’s release of its December quarter update earlier this week, which was notable for a low impairment charge of just $15 million.
Macquarie Securities said in a note that while these impairment numbers were not sustainable, if the banks’ underlying credit experience continues to “surprise on the upside” they can use COVID overlays to support earnings.
Also good news for Westpac, and to a lesser extent NAB, was the improvement in the net interest margin.
Westpac’s NIM rose 3 basis points (excluding notable items). The bank said lower funding costs and higher deposit spreads, plus a contribution from Treasury, drove the higher margin.
NAB said its margin was stable in the December quarter (excluding the impact of markets and treasury and higher liquids). The bank said competition and the impact of low interest rates were offset by home loan repricing and lower funding and deposit costs.
On credit quality, Westpac reported that stressed exposures fell from 1.91 per cent in the September half to 1.76 per cent in the December quarter.
At the end of January, 26,000 Australian mortgage accounts worth $10.7 billion, representing 2 per cent of total balances, were still on deferral. This is down from 149,000 deferrals worth $55 billion provided last year.
There were 2400 business accounts worth $400 million still on deferral at the end of January, representing less than 1 per cent of total balances.
The bank also reported that mortgage applications have started picking up, with a 34 per cent increase over the same period last year.
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