Lending growth softens for Westpac

  • By Christine St Anne

Westpac expects housing demand to remain soft as it reported a fall in lending across business and mortgages.

In its third quarter update on Tuesday, the bank reported a decline in residential mortgages in its Pillar 3 report.

Mortgages declined to $484 billion, just down from $486 billion in the previous quarter and down from $488 billion in the prior corresponding period.

The lending volumes contrast with the Commonwealth Bank and Bendigo and Adelaide Bank who both reported a lift in lending despite the challenged market.

Similarly, Westpac’s corporate lending also fell to $61 billion from $63 billion in the previous year, although it peaked at $69 billion in March.

Westpac CEO Peter King was questioned on whether he expects the decline in lending to continue into the fourth quarter in an analyst/media briefing.

“We will continue to see an outlook which is which is pretty flat in terms of demand for credit across business, corporate and SMEs,” King said.

“On the mortgage side, we have had some processing issues. We have resolved some of those issues.

“We are no happy that we are rebuilding application levels. But I do think general demand for housing in aggregate is still fairly soft and we expect that to continue through the rest of the year.”

King did not provide specific numbers around processing time improvements but added that the bank has been [been able to catch up a lot of the backlog that it had during April and May.

We think Westpac has probably missed an opportunity to pick up business from customers looking to refinance during the pandemic, Nathan Zaia, Morningstar

“In June there was a significant catch up on those volumes.

 “We continue to focus on how we can further improve that processing time and support our customers.”

According to Morningstar bank analyst Nathan Zaia it is always disappointing when loan growth is weak due to internal issues with the loan approval process.

“If the bank was intentionally slowing growth to manage margins and returns its understandable, but we think Westpac has probably missed an opportunity to pick up business from customers looking to refinance during the pandemic,” Zaia said.

“Commonwealth Bank has posted solid numbers and put it down to an efficient and consistent application process,” he said.

“Westpac in our opinion should be benefiting from the same scale advantages and perception of safety.”

The bank also provided details on its mortgage deferrals and expects deferrals to fall by nearly 50 per cent following a series of check ins with its customers.

Our customers are telling us that they are intending to start repayments again and we were seeing a lot of those payments come through, Peter King, Westpac

One analyst noted that this was “significantly better” than what the bank’s peers have reported although t was acknowledged that making comparisons in the current climate is tricky.

“We are reassured by Westpac substantially reducing the number of customers deferring,” Zaia said.

Around 7 per cent of Westpac mortgage balances have been deferred or 5 per cent of customer accounts.

“This is notably lower than Commonwealth Bank for example which reported 8 per cent of accounts still being deferred.” Zaia said.

Westpac has reduced the number of mortgage customers deferring to 78,000 from a peak of 135,000.

“We set ourselves the goal of contacting all the customers at the three month check in point and set up a process which was to opt in,” King said

Here the customer had to choose to request the package.

“The mortgage team have done pretty good job in getting those check-ins done.

“We are about 85 per cent through. Our customers are telling us that they are intending to start repayments again and we were seeing a lot of those payments come through.”

King acknowledged new customers could be asking for packages as the pandemic continues but early signs are positive.  

Hardships up

However, King said that around 1,000 people on mortgage deferrals who were not sure if they could start repayments in three months time were moved into hardship.

“We believe the bank has taken a more conservative approach to treatment of customers as being in hardship versus under deferral arrangements,” Zaia said.

“Evident in the higher number of customers in arrears and growth in risk weighted assets.”

Zaia noted that in May 2020 Westpac estimated changes to loan loss probabilities would negatively impact common equity tier 1 over the next two years by 1.05 per cent to 1.8 per cent cumulatively, depending on the severity and length of the downturn.

“Westpac in this quarter has recognised a 0.3 per cent impact, with no such outcome from Commonwealth Bank, National Australia Bank or Bendigo.

“We do not believe the mortgage book of Westpac is lower quality than peers,” Zaia added.

Australian mortgage 90-day arrears increased 0.55 per cent to 1.49 per cent in the quarter, while other banks have reported little change.

Zaia noted that the numbers were surprising given the fall in deferral numbers adding that “all eyes will now be on the “outlook for loan impairments”.

“We give management the benefit of the doubt that discretion of around the treatment of customers as deferring or in hardship is the differentiator between bank results,” Zaia said.

In fact King did highlight that customers asking for help before the deferral options were rolled out, were behind on payments, or have directly contacted the banks hardship assistance team to restructure the loan are all being treated as in hardship.

“Other banks have mentioned that offering customers to move from principal and interest to interest only as a way to prevent them from entering hardship,” Zaia said.

By the numbers

Cash earnings were $1.3 billion mainly due to the impairment charge of $826 million the bank booked in the quarter.

Net interest margin was 2.1 per cent

Common equity tier 1 capital ratio was 10.80 per cent.