Westpac half year profit falls after bad debts triple, but net interest margin up slightly

Westpac reported on Wednesday its net profit fell 15% to NZ$202 million in the six months to March 31, due largely to a tripling of bad debt charges and only moderate lending growth in a recessed economy. But in contrast with the two other Australian-owned banks to report for the March half, Westpac said its net interest margin increased to 225 basis points in the six months to March 31 from 216 basis points in the six months to the end of September. In the same period a year ago Westpac's net interest margin was 217 basis points. Westpac's new CEO George Frazis told interest.co.nz credit risk had been underpriced in previous years and was now being priced more accurately. He added that wholesale funding costs on international markets had risen from 14-20 basis points over swaps to 120-150 basis points over swaps since the Credit Crunch. Last week BNZ said its net interet margin fell 12 basis points to 2.23% in the first half of the fiscal 2009 year to March 31 from 2.35% in the previous half year and 2.49% in the same half a year ago. BNZ CEO Andrew Thorburn told interest.co.nz in an interview that margin pressure was focused mostly on the deposit margins, where banks were competing hard for domestic deposits. The cost of the retail deposit guarantee scheme also squeezed margins slightly. Also last week, ANZ National reported its net interest margin for its New Zealand businesses fell 24 basis points to 210 basis points in the six months to March 31 from the same period a year ago. It was down 9 basis points from the September half.

Frazis said the half year result reflected an unprecedented set of external circumstances and economic conditions would continue to be challenging for some time. Westpac's bad debt charges tripled to NZ$184 million in the six months while housing delinquencies rose to 82 basis points from 47 basis points. Westpac's lending growth slowed to an annualised rate of 3% in the half year from 6% in the September half and 11% in the same half a year ago. Business lending growth fell to 3% in the March half from 14% in the September half and 15% in the same half a year ago. Frazis said there was little indication that wholesale funding costs were easing from their current high levels and the cost for retail deposits was increasing. Westpac has been the only bank to cut any rate since the April 30 cut by the Reserve Bank in the Official Cash Rate. It cut its 6 month rate by 40 basis points to 5.39%, but held its other rates. The "severe stresses of the financial crisis" had now stabilised and the dominant impact on Westpac would be the size and duration of the recession, Westpac said. Slower loan growth was expected because of lower consumer borrowing and lower business investment. Consumers and businesses were also expected to "de-leverage their balance sheets," it said. "We are seeing more pressure across our business customers and expect consumer stress to grow as unemployment rises. As a result we do expect impairment charges to remain at a high level throughout Second Half 2009 and into 2010," Frazis said. Meanwhile, Westpac said the Reserve Bank of New Zealand had indicated to Westpac that an independent review of its status in New Zealand as a locally incorporated subsidiary, rather than the branch status it had until 2006. "We anticipate that any consequent operating model and governance changes will be appropriately outlined in WNZL's General Disclosure Statement for the year ending 30 September 2009." The full PDF with Westpac's result is available here (pages 80-82).