Banking profits have been a major talking point of late. Market commentators are raving about bad debts. And while their fear is understandable, talks of failing banks and housing bubbles are ridiculous. While it may be their job to lure in reader, the media are supposed to educate the public, not scare them. As it stands, they have definitely blown things out of proportions with the Big Four Aussie banks.
This morning, all eyes turned to Westpac Banking Corporation [ASX:WBC]. The bank revealed their result for the first half of 2016. In short, Westpac was able to grow revenues and net profits. But they fell short when it came to minimising bad debts.
Source: Westpac Group
But even though revenues and profits were up 5% and 3% respectively, it may not be enough for shareholders. It’s likely that investors will be more interested in focussing on the negatives. And when it comes to market commentators, there is never a shortage of negative news.
The results were slightly softer than expected. Westpac’s institutional lending business was hit hard, which left them $299 million short of net profit expectations. According to Brian Hartzer, CEO of Westpac:
‘Westpac’s Institutional Bank was affected by lower net interest margins and significantly higher impairment charges related principally to four large exposures which added $252 million to provisions.’
Interim dividends rose by 1%, to 94 cents, compared to the prior year. Dividends would be fully franked, which was in line with what most were expecting. But compared to six months ago, dividends remain flat. It will be the first time in seven years that Westpac has not increase dividend over a six month period.
Yet even with the sub-par results, Hartzer maintained: ‘Westpac remains well-placed to respond to this challenging environment.’ Various improvements have been made to Westpac’s current strategy. The bank has launched their ‘Service Promise’ program, along with a 24% reduction in customer complaints compared to the first half in 2015.
Yet while Westpac believes they’re delivering on their strategy, investors will most likely put their asset quality under the microscope. Due to a lack of write-backs, impairment charges rose 96%, to $326 million, compared to a year earlier.
But despite the mixed global conditions, Hartzer remains positive about Australia’s economic outlook. Why is this important? If Australia’s economy prospers, then banks are likely to prosper also, as a result of increasing levels of lending. This could also decrease Westpac’s level of bad debt. In addition, economic prosperity could mean better financial results for banks in the future. Hartzer again:
‘Australia’s transition to a more service-based economy is now well underway. While the higher than expected Australian dollar represents some risks on the export front, other aspects of the Australian economy are encouraging. The recent firming of commodity prices, solid employment growth – particularly in the service sectors – and ongoing low interest rates support that outlook.’
Hartzer may in fact be right in his assessment of the Australian economy. But we’ll just have to wait and see if his confidence is well founded.
Junior Analyst, Money Morning
PS: Westpac hasn’t lifted their six-month dividends for the first time in seven years. Does this mean that the bank is no longer a reliable dividend payer? Probably not. But this action still affects investors expecting dividends to increase at a reliable pace.
In fact, there are some investors who rely on ever-increasing dividends to earn an income.
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