Westpac warns on rates

THE housing market is already adjusting to rising interest-rate expectations, as buying sentiment weakens and turnover and clearance rates drop, Westpac chief executive Peter King says.

Announcing $3.1bn in halfyear cash earnings, up 71 per cent from the previous half, Mr King also warned that the

bank’s assessment of borrowing capacity for customers

would probably tighten as a result of inflation fuelling higher expenses.

“I don’t think it will be material,” he said. “(But) if I look at the sentiment survey for the time to buy a house, it’s dropped pretty low, so people are already adjusting.”

While the cash profit was up on the preceding half, it fell 12 per cent on a year ago, as the half-year dividend was raised 3c to 61c.

The market liked the result, driving the share price higher on Monday morning as Westpac renewed its commitment to $8bn in annual expenses and slashed costs by more than its retreating revenue.

The bank said costs would be 0-2 per cent lower in the second half.

Against that, the net interest margin was crunched by 17 basis points, excluding volatile treasury and markets, due to intense competition in the mortgage market where Westpac still faces challenges.

UBS said in a note that the result was a “solid beat” of consensus estimates, but questioned if it was enough to convince the market that aggressive cost targets could be delivered, particularly after ANZ and National Australia Bank abandoned their commitments last week.

Mr King said the bank was making “steady” progress towards its goals.

“We’re investing in improving the customer experience, focusing on making customer service easier and faster, accelerating digital, and building on our banker expertise and capability,” he said.

“Financially, the group’s results have improved.

“Cash earnings were higher over the previous half, including a material reduction in notable items.”

Asset quality, he said, had improved and most measures of credit quality were back to pre-Covid levels, but provisions were lifted due to supply chain issues, inflation, expectations of higher interest rates and recent floods.

Westpac persisted with its big cost reduction strategy, despite calls from some analysts to prioritise investment in a strong economy.

Mr King said he was pleased with the bank’s progress on costs, which were down 27 per cent, or 10 per cent excluding notable items, compared to the second half of 2021. This included a reduction in staff of more than 4000, as the group progressed towards its target of an $8bn cost base by 2024.

While the turnaround of the key mortgage portfolio saw growth in owner-occupier mortgages, Mr King said he wanted to improve performance in investor lending.

In the meantime, momentum grew in business lending in business and institutional banks. Overall, however, revenue was down 3 per cent on the previous half and 8 per cent compared to a year ago.