UPDATE: Westpac NZ delivers 15% lift in first-half net profit
(Updates with comment from David McLean from 5th par)
By Jenny Ruth
May 6 (BusinessDesk) - Westpac New Zealand will have brought a note of cheer to its parent’s dismal results as fixing problems revealed by the royal commission into financial services continue to dog the Australian bank.
Westpac NZ lifted first-half net profit 15 percent to $509 million but its Australian parent reported a 24 percent drop in net profit to A$3.2 billion for the six months ended March.
New Zealand chief executive David McLean says his bank benefited from its “ongoing focus on customer outcomes despite a maturing economic cycle and a changing banking environment.”
The result was helped by a fall in charges against profit for bad loans to $14 million, an historic low, from $38 million in the previous first half. It was also boosted by a $40 million gain from the sale of its Paymark stake.
"One of the challenges in a bank is you're always trying to think ahead and say, what are the things that might catch us in the future," McLean told BusinessDesk.
Westpac regularly conducts both its own and Reserve Bank-set stress testing. "It's hard to see things that could beat us because our book is becoming safer" but it's the nature of external shocks to be surprising, he says.
Reflecting the Reserve Bank's loan-to-valuation restrictions, Westpac's high LVR lending - providing mortgages to those with less than a 20 percent deposit - is now only 8 percent of its mortgage book. That's down from 22.8 percent in September 2013 before the first round of LVR restrictions took effect.
While net operating expenses rose 3 percent to $480 million, its expense to income ratio fell to 38.5 percent from 39.7 percent in the same six months a year earlier and from 43.4 percent in the six months ended March 2017.
Net interest margin eased one basis point to 2.23 percent. That’s below the 2.3 percent BNZ reported, up six basis points, and ANZ’s 2.38 percent, down from 2.42 percent.
“The low-margin environment and evolving regulatory outlook will present challenges into the second half of the year, but we have confidence in the fundamentals of the economy and our capability to execute in response to change,” McLean says in the statement announcing the results.
He told BusinessDesk that competition in the housing market has squeezed Westpac's home loan margins about three basis points but that the bank had been able to offset most of that impact in other areas.
Westpac NZ has delivered its response to the recent bank conduct review conducted by the Reserve Bank and Financial Markets Authority.
“Westpac NZ started removing product-based sales targets in 2017 and all sales targets were removed for frontline branch and contact centre staff from Oct. 1, 2018, with team members now assessed on a range of measures that include quality of conversations and a strong focus on meeting the needs of customers,” the bank says.
McLean says this change hasn't materially impacted sales patterns. "I think it means that our staff generally have been doing the right thing and that they haven't been incentivised by payments not to do the right thing.
"I think that really goes to show that the culture in New Zealand banks is generally a bit better."
There aren't any other major areas of change although the regulators have given the bank "a long list of things to work on," such as staff training to ensure they focus on achieving the best outcomes for customers, he says.
Westpac’s KiwiSaver funds under management rose 15 percent to $16.1 billion at March 31 while total deposits rose 4 percent to $64.2 billion. Net mortgages rose 4 percent to $49.6 billion and net business lending rose 5 percent to $30.9 billion.
Westpac says its customer deposits now fund 78.2 percent of its lending, up from 77.9 percent a year ago and 74.2 percent in March 2017.
McLean says Westpac's treasury management is now "pretty conservative" and "vastly different" to before the GFC when global wholesale markets froze for a time.
However, funding from wholesale markets is cheaper than household deposits, although those household deposits are the most reliable form of funding. "It's just a case of trying to balance" the sources of funding.
Within business lending, Westpac’s agricultural lending grew to $9.4 billion at March 31 from $8.9 billion a year earlier with the bank classifying 10 percent of its portfolio as stressed, down from 12.1 percent, and just 0.4 percent impaired, down from 0.5 percent.
“Overall portfolio health remains sound. Dairy stressed exposures have been largely flat since November 2018,” the bank says.
Its focus remains on supporting existing dairy customers with proven long-term viability, it says.
“Domestic milk production for 2018/19 is expected to be up slightly on last season following a record start. This is supporting higher Global Dairy Trade auction prices and lifts in 2018/19 forecast milk price.
“Regulatory reform, increasing costs and disease issues – M. Bovis – continue to pose challenges.”
The Australian parent’s results included A$617 million in provisions for estimated customer refunds and associated costs and a A$136 million charge for “the reset of Westpac’s wealth strategy.”
“The past six months has been a turning point for the bank. We are proactively addressing legacy issues while improving our products and services to ensure they deliver the right customer outcomes,” Westpac group chief executive Brian Hartzer says.
“We’re exiting personal financial advice to focus on the parts of our wealth business where we have a competitive advantage and we are delivering significant cost savings by simplifying our business.”
The dual-listed shares slipped 1.9 percent to $28.54 on the NZX in afternoon trading, and were down 1.5 percent at A$27.02 oin the ASX.