Westpac cash profit tops $1b
NZ unit unfazed by likely lift in capital requirements as Oz parent raises funds
Westpac New Zealand is weighing its options for meeting a likely increase to capital requirements ahead of next month’s decision by the Reserve Bank, says its chief executive.
The bank announced a cash profit rise of 3 per cent to $1.042 billion boosted by its one-off gain from the sale of its share in Paymark and a $10 million impairment benefit yesterday.
Its core earnings for the year to September 30 were down 1 per cent on the prior year to $1.422b while its net profit after tax rose 3 per cent to $964m.
The New Zealand business was one of the bright spots for its parent Australian bank Westpac Banking Corporation which announced plans for a A$2.5b ($2.7b) capital raise after it revealed a 15 per cent drop in its cash profit to A$6.849b.
WBC also cut its second half dividend from A94c to A80c. Australian media speculated that up to A$2b of the capital raise could be needed to meet increased capital requirements in Australia which kick in from January and that there would be little left in the kitty to help out the New Zealand arm.
But Westpac NZ chief executive David McLean was relaxed about the Reserve Bank of New Zealand’s capital proposals which are set to be finalised early next month. “The key point . . . is we don’t know yet.”
McLean said the bank had retained earnings and was well capitalised at the moment. It would also benefit from the lifting of capital restrictions which have been in place for the last 18 months.
In 2017 the Reserve Bank required Westpac to undertake an independent review of its compliance with internal models obligations.
The review found that Westpac was using a number of unapproved models and that it had materially failed to meet requirements around model governance, processes, and documentation.
The regulator imposed a precautionary capital overlay in light of the regulatory breaches, and gave Westpac 18 months to remedy the
failures or risk losing its accreditation as an internal models bank.
Deputy Governor Geoff Bascand said that following the remediation process, Westpac was now operating with peer-leading processes, capabilities and risk models in a number of areas and will retain its accreditation.
It will lift a two-percentage-point capital regulatory overlay from the end of this year.
McLean said when the extra requirement to hold 2 per cent came off it would benefit the bank.
“We have got a range of options. We haven’t got to that . . . point yet”.
Last week ANZ announced it was only going to pay 20 per cent of its cash earnings in a dividend to its parent compared to the 80 per cent it normally paid out.
McLean said its dividend usually moved around a lot and some years it didn’t pay anything to its parent. “It depends how much cash is built up.”
McLean described the result as “balanced” in a very challenging environment with lots of moving parts.
He said it had been focused on improving the experience of customers, while investing more into its technology and compliance areas.
McLean said business conditions had deteriorated in the second half of the reporting period based largely on uncertainty about the outlook into next year.
“Although significant risks exist globally, the local economy remains in reasonable health, our business is fundamentally sound and our balance sheet continues to be well managed.”
The bank’s net operating income rose 2 per cent to $2.415b but its operating expenses were also up rising 7 per cent to $993m.
Its net interest margin fell 8 basis points to 2.16 per cent.
Westpac saw a 5 per cent boost to its loan book to $84.2b with growth spread across its mortgage and business lending while deposits rose 4 per cent to $64.5b.
McLean said on the home lending front there had been fewer loans in the second half and tougher competition which had seen the banks competing for a smaller pool of customers.
“The Spring housing season is now under way. There does seem to be signs of life.”
Outside of the capital proposals
McLean said the big challenge was the uncertainty around the low interest rate environment.
“How do we avoid the stagnation that Japan went through over the last 20 years? If the economy needs stimulation what can the Reserve Bank do? These are the things nobody has got an answer to.”
But McLean said low interest rates would continue to put pressure on bank margins.
“It is harder and harder to maintain margins as everything compresses down to zero.”
McLean said low interest rates were providing opportunities for first home buyers and others looking to make a move in the property market.
“We’ve never seen interest rates this low in New Zealand. It helps with housing affordability and business investment, and presents a great opportunity for existing borrowers to pay down debt.”
Two-thirds of Westpac NZ customers were ahead in their mortgage repayments by a median average of eight months, or an average of $8652, at September 30, 2019, he said.
However, low rates had also meant returns reduced for savers.
Westpac’s KiwiSaver scheme also increased its funds under management by 15 per cent year-on-year, from $6.1b to $7.0b with the average balance up 16 per cent to $17,806.