The Westpac Banking Corp (ASX: WBC) share price will be one to watch on Monday.
This follows the release of the banking giant's half-year results this morning.
Westpac share price on watch amid profit decline
- Revenue down 8% year on year to $10,230 million
- Operating costs down by 10% or $624 million to $5,373 million
- Cash earnings of $3,095 million, down 12% over the prior corresponding period
- Cash earnings per share down 12% to 85.4 cents
- Net interest margin down 15 basis points to 1.91%
- CET1 ratio of 11.3%
- Fully franked interim dividend of 61 cents per share
What happened during the first half?
For the six months ended 31 March, Westpac reported an 8% decline revenue to $10,230 million.
And despite reducing its operating costs by 10% to $5,373 million, this couldn't stop the bank from reporting a 12% reduction in its cash earnings to $3,095 million. This was driven largely by poor performances from Westpac's Consumer and Business segments.
The Consumer segment, which is the bank's largest segment, reported a 15% decline in cash earnings to $1,646 million. This reflects a lower net interest margin and reduced credit impairment benefits, which offset a 3% increase in mortgages. Westpac advised that its Consumer margins were 25 basis points lower due to continued competition and portfolio mix changes including more fixed rate lending and lower card and personal loan balances.
The Business segment reported a 55% decline in its earnings to $239 million. This was due to a turnaround in impairment charges from a benefit to a charge and a 53 basis point (35 basis points excluding notable items) decline in margins. The latter reflects an increasingly competitive market and low interest rates.
The Westpac Institutional Bank was a positive performer and delivered a 3% increase in cash earnings to $306 million. This was driven by a 17% increase in lending and a 19% reduction in expenses, which was partly offset by lower loan spreads and widening counterparty credit spreads.
The Westpac New Zealand segment reported a 9% increase in cash earnings to NZ$635 million. However, this was driven by a profit on the sale of Westpac NZ Life. Excluding notable items, cash earnings fell 15% due to lower impairment benefits.
Finally, the Specialist Businesses segment delivered a 13% increase in cash earnings to $132 million. Though, once again, excluding notable items, cash earnings would have been down 41%.
Management commentary
Westpac's CEO, Peter King, remains upbeat on the Australian economy despite the challenges it faces. He said:
The first half of 2022 has been challenging for many customers. Floods, the lingering effects of the pandemic and the impact of the war in Ukraine have set many customers back and created uncertainty. However, the Australian economy is robust.
Consumer spending may be tempered by higher prices and higher interest rates. However, the positives of strong household and business balance sheets, combined with the continued reopening of international borders and local economies, will likely increase economic activity.
We expect the Australian economy to expand by 4.5% in 2022 but slow to 2.5% in 2023. Credit growth is forecast to be a strong 5.7% in 2022 slowing to 4.3% in 2023.
Mr King also spoke briefly about the housing market, which he notes has already started to show signs of cooling as rates rise. The CEO was also quick to point out that the bank and its customers are prepared for higher rates.
Demand for housing has already shown some signs of easing and rising interest rates are expected to contribute to a moderation in house prices next year. As the economy moves into the rising rate cycle, it's important to remember that rates are moving from a very low base and we already assess loan applications on higher rates, consistent with regulatory requirements.
Finally, Mr King laid out his plans for the bank's future, with Westpac focusing keenly on its Fix, Simplify and Perform strategy.
We will continue to deliver on our Fix, Simplify and Perform priorities. The CORE program is delivering to plan and improving our risk management capability. Our portfolio simplification is making the bank simpler.
The next big step is exiting super and platforms and we are well progressed. To improve performance, we are digitising customer journeys, improving customer service, growing in our core markets and resetting the cost base. Together these things are critical to delivering for our people, customers and shareholders.
How does the result compare to expectations?
According to a note out of Goldman Sachs, its analysts were expecting Westpac to report cash earnings of $3,146 million, a net interest margin of 1.82%, and a fully franked interim dividend of 60 cents per share.
This means that the bank has missed on its cash earnings but beaten on its net interest margin and dividend.
Another positive that could be supportive of the Westpac share price is that the bank has reiterated its bold cost reduction target despite two of its peers abandoning their own targets last week. Westpac continues to target a cost base of $8 billion by FY 2024.
