Westpac (ASX: WBC) has announced its FY19 result this morning, which included a sizeable dividend cut.
Westpac Banking Corporation, more commonly known as Westpac, is one of Australia’s ‘Big Four’ banks and a financial services provider headquartered in Sydney. It is one of Australia’s largest lenders to homeowners, investors, individuals (via credit cards and personal loans) and businesses.
Westpac’s FY19 Profit Fall
Westpac announced to investors this morning that its statutory net profit dropped by 16% to $6.78 billion. Its cash net profit fell quite hard as well, it dropped 15% to $6.85 billion.
There were a couple of main drivers for the report. The biggest one was related to the Royal Commission costs. Westpac said that customer refunds, payments, associated costs and litigation amounted to $958 million after tax during the year. It also spent $172 million after tax on the restructuring of its Wealth business.
Without these “notable items”, cash earnings only fell by 4% to $8 billion.
One of the main reasons why the underlying cash earnings dropped is that the bank’s net interest margin (NIM) fell by 0.10% (10 basis points) to 2.12%. This is the profit measure that shows the interest rate difference between what Westpac is able to lend out money compared to what it costs to secure that financing (eg bank deposits). A falling NIM means less profit.
Westpac’s Worsening Mortgage Book
The bank has seen a worsening of its Australian mortgage book over the past year. At September 2018, 0.72% of its Australian mortgages were in delinquency. At March 2019 it was 0.82%. At September 2019 it was 0.88%. The RBA recently cut interest rates to assist the Australian economy.
Capital Raising and Dividend Cut
The major bank announced that it was raising $2.5 billion in a capital raising to provide a buffer above APRA’s “unquestionably strong” benchmark. It also aims to create flexibility in case of capital change rules and the potential for litigation or regulatory action.
As a result of the profit fall and the capital raising, Westpac decided to cut the final dividend by 15% to 80 cents per share so that it had a more sustainable payout ratio.
Westpac Managment Comments
Westpac CEO Brian Hartzer said that apart from the Royal Commission the fall in profit was “mainly due to a reduction in wealth and insurance income from the exit of our financial planning business, higher insurance claims and the impact of regulatory changes on revenue.”
The bank said it expects to generate $500 million of productivity savings in FY20 as well as another $200 million from the Wealth reset.
Mr Hartzer believes the economy will remain subdued with consumers cautious because of flat wage growth. However, continued house price growth in Sydney and Melbourne may help.
Westpac predicts system credit growth of 3% in FY20, faster than the 2.7% growth in FY19.
At the time of publishing, Jaz does not have a financial interest in any of the companies mentioned.