All eyes will be on the Westpac Banking Corp (ASX: WBC) share price this morning after the bank unveiled a 24% crash in net profit as it had to pay penance for its past misdeeds amid a weaker operating environment.
The Westpac share price has lost around 6.5% over the past year to close Friday at $27.44 when the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index has gained 4%. The fall is still relatively modest as shares in the big banks have bounced in recent weeks on the hope that the worst is behind the sector.
The question is whether Westpac's results adds to this confidence even as its first net profit tumbled to $3.2 billion, while the more closely watched cash profit figure plunged 22% to $3.3 billion.
The ugly side of Westpac's results
The bank's bottom line was hurt by a circa $750 million in remediation and restructuring items, including costs linked to big changes in its wealth business.
The weaker profit has also hurt Westpac's return on equity ratio (ROE), which fell a significant 3.5 percentage points to 10.4% and its net interest margin (NIM), excluding its Treasury and Markets divisions, dropped 12 basis points to 2.04%.
On the upside, Westpac didn't follow National Australia Bank Ltd. (ASX: NAB) in cutting its interim dividend. Westpac kept its first half payment steady at 94 cents a share, which implies a yield of nearly 10% if franking is included.
Is there light at the end of the tunnel?
Management also said it was on track to cut costs by around $400 million over the full year and the quality of its loan book still looks sound with only a modest 10 basis point uptick in 90+ day delinquencies.
Westpac's balance sheet looks strong too with the CET-1 ratio remaining at 10.6% over the period, which is above the 10.5% level that APRA has set for a bank to be considered "unquestionably strong".
That would be a relief to those who were worried following Australian and New Zealand Banking Group's (ASX: ANZ) result last week.
Foolish takeaway
However, Westpac isn't out of the woods and the latest results show how little room for error it has – particularly when it comes to its sacred dividend. The payout ratio in the half stands at 98% and that means a small drop in future profit could force the bank to trim its dividends.
Given the weak operating environment, Westpac has to bank heavily on cost cutting to keep it away from that red line.
Management is probably also counting on many shareholders taking up its dividend reinvestment plan (DRP), which is set at a 1.5% discount to Westpac's market price.
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