Debt provision swells as Westpac profit falls

By ROELAND van den BERGH – The Dominion Post

Westpac New Zealand is blaming the unprecedented economic downturn for a 15 per cent cut to its tax-paid profit of $202 million for the half year to March. Bad and doubtful debt provisioning ballooned to $184m from $61m a year earlier as the deteriorating economy impacted on business and households.

A total of 140 Westpac customers lost their homes in mortgagee sales during the half year, the same number as for the whole of the previous year.

Chief executive George Frazis said the result reflected an “unprecedented set of external circumstances”. He expected economic conditions to continue to be challenging for some time.

Even if the recession ended next year, it would take six months before the effects washed their way through business activity, Mr Frazis said. “In the circumstances this is a sound result.” But while the bottom line was down, core earnings were up 13 per cent to $471m.

Net interest income gained 10 per cent to $622m, while other income, including fees, was up 5 per cent to $214m. Mr Frazis said the reduced bottom line demonstrated that Westpac was shouldering its share of the economic downturn burden. “The fact that underlying profit is up is very pleasing from an economic perspective.”

It showed that the bank was continuing to lend, which was the No1 concern for business, Mr Frazis said. That compared with the situation in the United States and Britain where widespread bank failures had seen lending dry up, hindering the economic recovery, he said.

Business lending was up 9 per cent, mainly through the agriculture, infrastructure and small business sectors. “We have provided an additional $350 million over the last six months to help small businesses invest, grow and protect jobs,” Mr Frazis said. Most of the impaired loans were in business lending.

Small businesses also often used their homes as a security for a commercial loan. Businesses have complained that lower official interest rates were not being passed through to the same extent as mortgage lending. But Mr Frazis said the interest rates the bank had to pay to attract domestic deposits, which made up 60 per cent of the bank’s funding, were significantly higher than the official cash rate.

Funding rates from international wholesale markets, which made up the balance, were dramatically higher because of the global credit crisis which was showing little sign of easing. Margins on lending had improved slightly to 2.25 per cent, but were still below those earned three years ago.

Deposits grew 6 per cent to $28 billion and total loans stood at $47.1b, up 4 per cent. Home lending had slowed to 3 per cent as households looked to reduce debt. Lending growth was expected to remain subdued as a result of reduced demand and more customers would come under pressure as the effects of the slowing economy became more widespread, including more job losses.

“We are seeing more pressure across our business customers and expect consumer stress to grow as unemployment rises,” Mr Frazis said. As a result provisioning for bad and doubtful debt would remain high into next year, he said. Higher costs were offset by revenue growth giving a 250-basis-points improvement in the expense to income ratio to 43.7 per cent.

Westpac was well placed to weather the current economic conditions, Mr Frazis said.