Westpac has lifted its first-half cash earnings 5 per cent to $4.25 billion, on higher profit margins and ultra low bad debt charges.
The profit came in slightly higher than market expectations due to higher treasury and markets income, wealth management revenue and the low loan losses.
Revenue rose 3.3 per cent to $11.15 billion on the immediately preceding half driven by a higher net interest margin which grew by a solid 7 basis points to 2.17 per cent.
The increase was, however, 3 basis points by stripping out a 4 per cent boost from the lender’s markets and treasury business.
Net interest income rose 5 per cent to $8.21 billion, with non-interest income rising 2 per cent to $2.85 billion.
“Our businesses continue to perform solidly, with the results for the consumer and business banks particularly good, chief executive Brian Hartzer said.
“All businesses increased core earnings over the prior half."
Loan quality good
Westpac’s largest division, the consumer bank, posted 6 per cent profit growth half on half, while its business banking arm delivered a 3 per cent bump.
Interestingly, cash earnings at BT Financial Group were up 9 per cent to $404 million year-on-year.
At an analysts' briefing, the Westpac boss hotly defended the quality of the bank’s loan book - which has been queried by analysts - saying it remains "fundamentally sound”.
A recent review by APRA found Westpac was a "significant outlier" among the major banks in its exposure to high loan-to-value and interest-only loans, based on a PwC report.
Hartzer told analysts that the APRA review raised questions about data collection and verification but that those concerns were quashed in later studies.
"After reviewing the sample again, we found only one loan that wouldn't have been approved and that loan is currently ahead on its repayments."
Also, at the briefing, Westpac finance director Peter King argued that the PwC analysis included a data set that was incomplete "so conclusions from it will likely be incorrect".
The Westpac chief executive described the result as “good quality” built on consistent performance and a disciplined approach to growth and returns.
He said operating costs rose 1 per cent on the half to $4.65 billion. This was mostly driven by increased investment in technology, and regulatory and compliance costs, including $34 million in additional expenses for the royal commission.
Hartzer also stressed that banks cost to income ratio fell to an above peer 41.7 per cent.
The chief executive said the royal commission affected the environment for financial services and raised "serious questions" about customer treatment, incentive structures and conflicts of interest.
Hartzer told the briefing that the industry gets the seriousness of those concerns.
“It’s inexcusable, especially when customers have been affected,” he said referring to some of the damaging revelations that emerged from the public inquiry.
He also said Westpac would continue to make changes based on feedback from customers, regulators and the royal commission itself.
"We have been actively seeking out instances where we've got it wrong, and in those cases, putting it right for the customers affected," he said.
Westpac has made more than 150 changes to improve customer products over the past three years and would make further changes.
Hartzer predicted the Australian economy would growth near its long-term average pace of about 2.7 per cent for the rest of this year and next.
But he said that with household income growth "lacklustre" and very low levels of inflation, the central bank was likely to leave the official cash rates on hold "for some time”.
Asset quality is "expected to remain in good shape” for the second half and he expects "system lending growth to further moderate”.
Hartzer says headwinds to the growth outlook include higher funding costs and increased scrutiny on the banking industry.
The lender’s common equity tier 1 ratio stands at 10.5 per cent.
Morgan Stanley analysts called it a "solid and clean result" while Bell Potter focused on the wider margins and cost control.
A solid result given the net interest rate expansion,” added UBS.
“However this may make further repricing for higher funding costs (BBSW-OIS) more challenging. Asset quality remains solid.”