Australia's Westpac takes hit to margins, shares tumble despite buyback

Sydney

WESTPAC Banking Corp on Monday (Nov 1) disappointed investors hoping for a quick restructure at Australia's No 3 lender, revealing big cuts in margins and still-high expenses, knocking its shares sharply lower.

Westpac reported cash earnings for 2020/21 of A$5.35 billion (S$5.42 billion), just below expectations but more than twice last year's result after the release of funds set aside for pandemic losses, and announced a A$3.5 billion share buyback.

However, its shares sank more than 6 per cent to an eight-month low as investors pointed to the fall in margins, particularly in the second half, and higher expenses, which put pressure on core earnings.

"Our underlying results are not where we want them to be, and we recognise we have more to do to become the high-performing company we aspire to be," chief executive Peter King said.

Westpac is slowly emerging from a costly turnaround to fix outdated software and convoluted procedures that led last year to record fines for breaches of anti-money laundering law and market-share losses in mortgages, it's main product.

"They are on a far better footing going forward, but the market has focused on the cost of rectification rather than the benefits that flow from this," said Regal Funds Management portfolio manager Mark Nathan.

"I think the market expects most of the cost benefit to flow through in 2023 and 2024, rather than through the 2022 fiscal year," he said.

A rebound in the Australian economy and sky-rocketing house prices helped drive a 4 per cent rise in Westpac's mortgage book after a decline last year, but the growth came at the expense of margins.

Net interest margin, a key measure of profitability that measures the difference between what banks charge for loans and what they pay, fell 10 basis points during the second half, to 1.99 per cent. For the full year, it was 4 basis points lower at 2.04 per cent.

In the second half, cash earnings fell at all the bank's business units, including retail and business banking, institutional banking and its New Zealand subsidiary. Core profit, excluding a pre-announced A$1.3 billion hit from Westpac's institutional bank and remediation costs, was 13 per cent lower for the year.

"We expect significant consensus earnings downgrades on the back of today's result," Macquarie banking analyst Victor German said.

Westpac CEO King said competition was likely to put further pressure on margins.

Smaller rival Australia and New Zealand Banking Group last week reported flat margins but a shrinking loan book, missing out on the pandemic-induced boom in home lending, and vowed it would prioritise re-growing its home lending business.

Westpac's King also reiterated his commitment to cutting the bank's cost base by over a fifth to A$8 billion by fiscal 2024, a key part of his strategy. Still, that is far from the A$11 billion in costs it reported on Monday that excluded an A$2.3 billion one-off "notable" charge.

Westpac said it expects demand for credit to remain high, although home price growth would likely moderate to about 8 per cent, King said, given tighter restrictions on home lending.

The bank declared a dividend of A$0.60 a share. REUTERS