The Westpac Banking Corp (ASX: WBC) share price is on watch after reporting a huge jump of profit in the FY21 half-year result.
Westpac’s strong first half
The big ASX bank has reported how it performed in the first six months of FY21.
Cash earnings jumped 256% to $3.54 billion and statutory net profit went up 189%. Cash profit / earnings per share (EPS) more than tripled to 97 cents. Excluding ‘notable items‘, cash earnings rose 60% to $3.82 billion.
Westpac explained that the first half earnings were considerably higher, mainly because of an impairment benefit reflecting improved asset quality and a better economic outlook.
In the first half of FY20 there was an impairment charge of $2.24 billion, in the second half there was an impairment charge of $940 million. Looking at this reported half, there was an impairment benefit of $372 million. Things have turned out much better than feared, which is why the Westpac share price fell so much last year.
The big bank told investors that it’s strengthening its focus on costs and announced a three-year plan to reduce costs, so that it can be more streamlined and a simpler organisation with a bigger focus on digital and smaller head office. It expects to invest $3.5 billion to $4 billion over the next three years.
It’s targeting an $8 billion cost base by FY24 to materially improve efficiency and costs. Costs will increase in FY21 and then fall from FY22.
Other financial metrics
Year on year, the net interest margin (NIM) was down 4 basis points (0.04%) to 2.09%. However, compared to the second half of FY20, the NIM rose 6 basis points (0.06%). That shows that things may be starting to get better for the bank. The NIM shows how much profit margin Westpac is making on the loans it gives out.
Westpac’s return on equity (ROE) went up 2.9% to 10.2%.
The common equity tier 1 (CET1) ratio rose by 153 basis points (1.53%) to 12.34%.
Westpac dividend
The rise in cash earnings helped the board declare an interim dividend of 58 cents per share.
It didn’t even pay a dividend a year ago. So this is a big improvement.
Outlook for the Westpac share price
Westpac said the economy is now rebounding with unemployment falling. There are now more people employed than before COVID. It’s expecting the economy to grow 4.5% in 2021, with 4.6% growth of total credit and residential lending growing by 6.5%.
It’s also expecting house prices to keep growing, though the growth should slow as supply increase.
Westpac continues to assess what to do with Westpac New Zealand.
It’s good to see that Westpac’s dividend is returning to normal. I’m not sure if it’s a buy now with profit and expectations largely back to normal. Before COVID-19, bank profit growth was pretty slow going. They are already huge businesses.
There are plenty of ASX dividend shares that still have good profit growth potential.
