Westpac profit surges 256%: Ambitious cost cut plan announced.
Westpac revealed a better-than-expected first-half cash profit of $3.53 billion on the back of a brightening economic outlook. The bank’s earnings - which were up a stunning 256 percent on the prior first half - were struck on revenues of $10.68 billion.
The result was largely driven by low underlying bad debts in the second quarter coupled with the release of collective provisions.
Banks worldwide are moving to reduce the provisions made for bad loans at the height of the pandemic when its financial impact was feared to be drastic.
Despite the good result, net interest income of $83.34 billion was $652 million lower than for the previous corresponding period reflecting a fall in interest margins to 2.06 percent.
At $5.99 billion, costs were lower than for the 2020 first half although that period included $1 billion of costs associated with breaching anti-money laundering laws.
Commenting on the result, Peter King, Westpac chief executive, said is a promising start to the year as the bank saw increased cash earnings, growth in mortgages, and continued balance sheet strength.
“First half earnings were considerably higher than the prior corresponding period, mainly due to an impairment benefit reflecting improved asset quality and a better economic outlook,” he said in a release. Of the turnaround from a $2.2 billion credit impairment in the previous result to a $372 million benefit, the chief executive told analysts at a briefing that he didn’t recall ever seeing that before.
Getting things right
King said the Westpac was strengthening its focus on costs and announced a three-year cost reset plan to set the bank up as a more streamlined, simpler bank with a stronger digital focus and smaller head office.
“We need to do things differently to deliver a competitive cost base, including redesigning and digitising many of our processes,” he added. “Getting the process right for customers and being more competitive has delivered benefits."
As predicted, the market focussed on Westpac's ambitious plan to achieve an $8 billion cost base by 2024 even though King warned that costs will likely increase in 2021 before starting to fall from 2022.
Citi analysts said they were encouraged by a strong ‘hard target’ and building blocks that are consistent with their analysis of Westpac's opportunity. “They see big opportunities on cost across branches; risk and compliance spend and divestments.
King said Westpac’s Australian mortgage book had increased $2.6 billion over the past six months, with good growth in owner-occupier loans partly offset by lower investor lending. Owner-occupier loans increased 3 percent, with first home buyers making up 13 percent of new loans, the bank said in a release.
As for governance, the chief executive said Westpac has more than doubled the number of people in its financial crime operations team over the past 18 months and added more than 100 roles in risk to improve the lender's risk management capability.
King also said the lender was focused on completing legacy customer remediation as quickly as possible. Over the half, Westpac paid $200 million to approximately 500,000 customers as part of customer remediation.
Return on equity rebounded 2.9 percent to 10.2 percent.
The lender will pay an interim dividend of 58 cents per share. The group’s common equity tier one capital ratio was 12.34 percent at the end of March, up 153 basis points on the year.
Westpac's shares jumped more than 4 percent to $26 on Monday.