The Westpac Banking Corp (ASX: WBC) share price is under the spotlight today after the major bank released its FY21 first quarter update.
Westpac’s FY21 Q1 profit recovery
The big bank announced that its first quarter statutory net profit was $1.7 billion, with cash earnings of $1.97 billion. Westpac explained that underlying cash earnings were better due to higher margins, lower expenses from the phasing of investment spend and an impairment benefit.
The underlying cash earnings were up 54% compared to the FY20 second half quarterly average excluding notable items, like provisions for AUSTRAC proceedings, royal commission costs and so on. Core earnings were up 28%, or 3% excluding notable items.
Westpac disclosed that it had an impairment benefit of $501 million from improved credit quality, the stronger economic outcomes and a better economic outlook.
The net interest margin (NIM) – how much banks make from lending out money, after the cost of borrowing that money is included – improved by 3 basis points compared to the second half quarterly average, rising to 2.06%. This is a good sign for the profitability of the business, in the short-term at least.
Westpac revealed that the number of loan deferrals continues to decline. At 31 January 2021 it had $11 billion of Australian mortgages still being deferred, with significant roll off expected in February and March.
The bank said that its stressed assets (compared to the total loan book) exposure improved by 15 basis points (0.15%) with almost all segments improving. Consumer 90+ day delinquencies were lower quarter on quarter, with Australian mortgages overdue by 90 days falling 16 basis points (0.16%) to 1.46%.
Westpac’s balance sheet
The major bank revealed that its common equity tier 1 (CET1) ratio was 11.9%. This was an improvement of 74 basis points (0.74%) over the quarter and 111 basis points (1.11%) year on year.
I think it’s good news that Westpac’s CET1 ratio is now comfortably above the unquestionably strong benchmark set by APRA. It also means the bank is more likely to pay a decent dividend in the next result.
Summary thoughts
It’s good to see that Westpac’s loan book is improving and the overall profit is returning to normal. Hopefully the remaining loan deferrals don’t turn into bad debts. The strengthening housing market in Australia should help in this regard.
The Westpac share price has recovered significantly since the COVID-19 crash, so I don’t think it’s a cheap buy now. The low interest rate environment will make ongoing strong profit growth difficult from this level in my opinion.
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