Westpac underlying earnings fall 50% as bad debt charges jump

Westpac New Zealand had a "challenging and disappointing year" in the 12 months to September 30, the Group said in its annual report. Westpac New Zealand's cash or underlying earnings fell 50% from the 2008 year, while bad debt charges jumped 236%, or by NZ$402 million, to NZ$572 million at the end of September 2009. Cash earnings were NZ$236 million during the year, with only NZ$34 million in the six months since March 2009 as two thirds of the year's impairment charges were concentrated in the second half of the year. The jump in impairment charges included two "large names" which accounted for NZ$199 million in impairment charges with a relatively high level of provision requirement, Westpac said. In its June quarter results Westpac said it had booked provisions for loans from two borrowers worth A$135 million (NZ$165 million at the time). Net interest income rose 7% over the full year, but fell sightly in the second half of the year from the first half. Mortgage lending grew 3% over the year, while deposits grew 6%. Term deposits rose by 19%. Here are Westpac New Zealand's comments on the financial year:

New Zealand division has had a challenging and disappointing year in a weak economic environment. New Zealand delivered cash earnings of $236 million over the year, well down on the Full Year 2008 given a tripling of impairment charges to $572 million. While cash earnings were lower, the business delivered core earnings (before impairment charges) growth of 4%. The improvement in core earnings was driven by a 7% increase in net interest income with a 5% rise in average loan balances supported by a 7 basis point improvement in interest margins. Lending spreads were 36 basis points higher due to the repricing of business facilities to reflect higher risk premiums and mix benefits from a shift to floating rate mortgages from fixed rate. In New Zealand, deposit competition has been intense and that combined with a large shift into lower spread products (mostly term deposits) has led to a contraction in deposit spreads over the year by 56 basis points. Loans and deposits grew 3% and 6%, respectively, compared to Full Year 2008, due to the following key movements:

• Mortgage growth moderated over the year increasing 3% as lower house prices and weaker economic activity dampened demand. This growth was in line with New Zealand system growth of 3%. Third party originations accounted for 32% of new mortgage lending for the Full Year 2009, up from 27% in Full Year 2008;
• Other consumer lending was largely unchanged, with slowing consumer spending and a lower risk appetite given the weaker economic environment;
• Business lending saw a marginal increase of 1%, impacted by deleveraging and low economic activity; and
• Deposit growth was very solid with virtually all of the growth recorded in term deposits. The growth in deposits was sufficient to fund lending growth.

Non-interest income fell 4% over the year due to lower transaction and activity fees given reduced customer and merchant activity. Income was also lower from mortgage funds, which was unusually high in Full Year 2008. Expenses grew 3%, compared to the Full Year 2008 with employee expenses rising 2% with general wage rises partially offset by a fall in temporary employees. Other contributors to expense growth over the year included higher lease costs from the transition into a new head office, and continued expenditure on online and self-service customer solutions. The large rise in impairment charges reflects two large impaired assets and a general deterioration in asset quality in both the business and consumer portfolios. The two large names accounted for $199 million in impairment charges with a relatively high level of provision requirement. Other impairment charges in the business portfolio increased $156 million compared to Full Year 2008. Most of the increase can be traced back to the stressed commercial property market; particularly apartment development properties where falling asset prices have placed pressure on pre-sale contracts and softer asset prices have impacted developers' cash flows. Business impaired assets to total committed exposure increased from 0.15% at 30 September 2008 to 0.42% as at 30 September 2009. In the consumer portfolio impairment charges increased $47 million compared to Full Year 2008. The major movements were:

• $12 million increase in other consumer lending impairment charges; and
• $33 million increase in mortgage impairment charges, driven mainly by customers that rely on business earnings to service their mortgage.

Delinquencies greater than 90 days rose by over 28 basis points for mortgages and 3 basis points for other consumer lending compared to 30 September 2008. Most of the rise in delinquencies was reported in the first half. This is consistent with the unemployment profile in New Zealand where the unemployment rate moved higher to 6% but has not materially deteriorated in recent months.