The last of the big four posted its HY result Monday morning and it was a good one. Cash profit came in at $4.198m up 7% which was in line with expectations. Interim dividend of 94c was lower than an expected 95c. Revenue was up 4% to $11.15m. ROE was 14% at the top end of its guidance range. Common equity Tier 1 ratio was 10.5% and in line with the other banks. The NIM was up 10bps to 2.17%. A rise in Treasury & Markets income contributed 4bps to NIM, while margins excluding Treasury & Markets increased 3bps. Westpac’s impairment charge fell 20% to $393 million, or 11bps of gross loans.

In regards to the Royal Banking Commission, WBC acknowledged the significant affect it has had on customers and the community. WBC says it is taking steps to restore confidence in not only its customers but the community too. The bank said, “We have been actively seeking out instances where we’ve got it wrong, and in those cases, putting it right for the customers affected. Over the last three years we have reviewed more than 300 products and made over 150 changes to our products, policies, and business practices, including introducing a low rate credit card, removing sales incentives for tellers, and providing an independent advocate for our customers. This work is ongoing and we will continue to make changes to our business based on our reviews and feedback from our customers, our regulators, and the Royal Commission itself.”   

Heading into these results, there were concerns that WBC’s lending book was heavily weighted towards mortgages unlike ANZ and NAB, and switching could cause margin pressure. WBC is considered the largest lender to investors/landlords. As borrowers switch from interest only loans to principle and interest loans, there is usually a negative impact to the bank’s margins. So comes into question the loan quality of WBC’s mortgage book. In today’s result, WBC said its “Mortgage book is fundamentally sound.” There has been little change to 90+ day delinquencies over the half and properties in its possession reduced to 398 over the half, out of a portfolio of about 1.6 million loans and its margins are ok.

Looking at the mix, you can see that there has been a shift from interest to principal and interest.

Unconventional View: Overall it was a solid performance. A quality result that didn’t contain any nasty surprises or negative standouts. Cash earnings were in line with expectations, the dividend was a touch below but ok, NIM rose higher than expected, impairments fell 20% which was great and the quality of the loan book was good. Very few customers are defaulting and 70% of its customers are ahead on their repayments. Things are looking OK. Margins may come under pressure going forward the housing market starts to cool further. Remember WBC is at more risk than any of the other banks due to its high mix of investor loans means. Besides that, this was a strong result and we’re reasonably confident WBC should open higher.