Westpac cold on floating rate cut

Faced with declining profitability as loans to struggling businesses go bad, stubbornly high wholesale funding costs and a fierce dogfight for retail deposits, Westpac says it is not about to cut its floating mortgage rate in response to last week's Reserve Bank rate cut.

Westpac yesterday reported a March half net profit of $202 million, down 15 per cent on a year ago.

Core earnings were up 13 per cent but were undermined by a 200 per cent leap in impairment charges for bad and doubtful debts at $184 million.

New chief executive George Frazis said that given the unprecedented set of external circumstances it was "a sound result that our customers and other stakeholders should welcome".

Frazis told the Business Herald the bad debt charges were primarily in Westpac's business banking operation, and had begun in property development lending but were now spreading to other sectors.

He said one of the main drivers of rising home loan delinquencies was increasing loan defaults by business owners who had borrowed against their homes.

Frazis said revenue growth of 8 per cent had been fuelled by increasing customer numbers and doing more business with them.

Deposits rose 6 per cent to $28 billion and net loans were up 4 per cent to $47.1 billion, with business loans up 9 per cent to $14 billion.

Tight cost management held expense growth to 2 per cent.

However, while net interest margins, the difference between a bank's interest income and interest costs, have narrowed in the past 12 months at ANZ National and BNZ, which reported their first-half results last week, Westpac's has widened by eight basis points to 2.25 per cent.

"It hasn't gone up by a huge amount and basically it's still below levels it was at three years ago," said Frazis, who pointed to his bank's 15 per cent decline in net profit as evidence that "there's no doubt that the banks are taking their share of pain".

Asked about the lack of pass-through to Westpac's customers of the RBNZ's 50-basis-point OCR cut last week to 2.5 per cent, Frazis said the bank had reduced its six-month fixed mortgage rate by 40 basis points to 5.39 per cent and in the past 12 months New Zealand customers had benefited from more pass-through of official rate cuts into retail rates than those in most other countries.

"As more customers get off fixed, which will be quite a substantial amount by the end of this calendar year, they're going to actually benefit from the lower variable rates and provide even more stimulus to the economy."

But pressed on whether his bank would pass on last week's OCR cut to its variable rate any time soon, Frazis indicated that was unlikely.

"There's no plans in the immediate near future."

He said the cost of funds remained a key focus for the bank.

"Competition for deposits is increasing more aggressively as we speak and basically the pressure on wholesale funding has not eased off."

Frazis expected impairment charges to remain high into next year, although there were some early signs that the rate of increase was slowing.

While Westpac has been criticised for what has been called an aggressive approach to loan recoveries, particularly in the property and business sectors, Frazis defended the bank's record, saying it has taken a more sophisticated approach than had been seen in previous downturns.

"Back in the 1990s, banks acted quite quickly to restructure loans and that created an issue where property values declined quite sharply and made the recession worse.

"What we're seeing is a more disciplined view on what a viable business is going forward and seeing those businesses through. At the end of the day there are some hard calls to be made."

EARNINGS DOWN

Six months to March 31 - Westpac

Net interest income
2009: $622m
2008: $568m

Core earnings
2009: $471m
2008: $415m

Impairment charges
2009: $184m
2008: $61m

Net profit
2009: $202m
2008: $239m