Westpac has posted a $3.4 billion net profit as its fortunes swing on a ‘better economic outlook’ and falling loan deferrals

Westpac expects a better Australian economy will help it deliver better results. (Asanka Ratnayake, Getty Images)

• Westpac has revealed it made a $3.5 billion first half cash profit.
• Attributing the result to a “better economic outlook”, Westpac has begun writing back provisioning for bad loans as deferrals have fallen.
• Growth in the business was helped along by increased lending and profitable sales of the bank’s stake in Zip and Coinbase.
• Visit Business Insider Australia’s homepage for more stories.

Westpac’s latest results show just how firmly Australia’s largest banks have their fortunes fixed to the property market.

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Unveiling its six-month performance on Monday, the country’s number two bank boasted a $3.4 billion net profit having tripled cash profits from last year’s first half. Much of the result was attributed to a “better economic outlook” as the risk of defaulting borrowers falls.

“The fact that we’re forecasting unemployment of 5% by the end of the year is because economic activity is back,” CEO Peter King said.

“The [closure of] international borders is much more complicated picture because you’re operating in a world where there are different levels of vaccinations…so that is probably going to be a lot longer than we thought or hoped. But if we have a domestic economy which is continuing to grow and continuing to employ people, I think that’s really good for the country.”

In turn, that optimism has helped drive financial distress lower.

“Australia and New Zealand have managed the pandemic well and we are proud to have helped so many customers return to full repayments,” CEO Peter King said, noting 1.6% of its borrowers remained ‘stressed’ compared to 1.91% back in September.

Progress on that front is thanks to an enormous investment made by the banks, with Westpac hiring the equivalent of more than 4,500 full-time employees, mostly to deal with customers in hardship.

With deferrals now ending, it allows Westpac to pull back on building the large rainy day fund it and the other big banks put together last year.

At the same time the banking sector has largely claimed victory over deferrals, Westpac acknowledged that stress still remains among households and would lead to rising delinquencies in the coming six months.

“While the economic outlook is more positive, there is still some uncertainty and we have remained prudent in our impairment provisioning,” King said.

Both ANZ and Westpac have both begin writing back that provisioning, while NAB and analysts say banks aren’t quite out of the woods yet. All will need to wait for the next set of results to see who got it right.

Helping deliver a larger-than-expected cash profit, it saw Westpac announced a bumper 58 cent per share dividend. King noted the bank would continue to look to pay out to shareholders a rate of between 60 and 65%, attributing ongoing lower banking profits to record low interest rates.

It comes at the same time a red hot property market propel borrowers into bank branches, lifting lending to record highs. Westpac continues to trail the mortgage growth recorded by the Commonwealth Bank and smaller banks like Bendigo.

“Our Australian mortgage book 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%, with first home buyers making up 13% of new loans,” King said.

“While we expect continued increases in home prices, as the supply of houses for sale increases, the rate of house price growth will likely moderate.”

The six months was also buoyed by windfalls stemming from both Westpac’s sale of its stake in buy now, pay later platform Zip and crypto exchange Coinbase, for $367 million and $288 million respectively.

Providing a three plan, Westpac said it would focus on cutting $8 billion in costs in three areas, divesting and exiting some specialist businesses, closing around 50 branches and increasingly moving to digital banking, as well as reducing its head office.

It says its goal is to create a “simpler bank” for complex times.