Westpac boss Peter King has played down fears Australia is headed for a fiscal cliff once government stimulus is cut next month, after a surprise drop in bad debts drove the lender’s quarterly profits sharply higher.
Mr King on Wednesday joined other bank chiefs in declaring the Australian economy had rebounded from the COVID-19 shock much faster than expected, leading to more favourable conditions for the banks.
Westpac CEO Peter King expects a continued recovery in mortgage lending this year.Credit:Alex Ellinghausen
The upbeat outlook came as the bank slashed bad debt provisions, helping to drive unaudited cash earnings for the December quarter to $2 billion, a 54 per cent rise on the quarterly average from the September half, excluding notable items.
Westpac also gave investors hope it had turned around market share losses in its flagship mortgage business, and delivered higher than expected net interest margins, which compare funding costs with what banks charge for loans. Analysts have upgraded their profit forecasts for Westpac, with some predicting higher dividends may be on the cards for shareholders. Westpac shares jumped on the back of the update, closing 4.6 per cent higher at $23.54.
With the government planning to wind back the JobKeeper scheme in March, Mr King said Australia had cause for optimism in how its economy was handling the pandemic, and the withdrawal of taxpayer support.
“We’re really in steps — I don’t like this cliff analogy. We’re just going through stages and I think they are steps now. We’ve managed, in aggregate, the transitions pretty well.”
“Yes we’ve got further changes coming with government stimulus, but we’ve got a banking system that’s in great shape to help people through the period, we’ve got low interest rates which will help, we’ve got domestic activity hopefully continuing to pick up.”
Morningstar analyst Nathan Zaia said the market had been been concerned that Westpac’s loan book was worse than its rivals, but the update and an improvement in arrears rates had allayed those fears.
The update also calmed investor concerns about its capital position, with the bank’s common equity tier 1 capital at 11.9 per cent of risk-weighted assets, well ahead of the 10.5 per cent level required by regulators. Mr Zaia said he was assuming the bank would materially lift its dividend to a 75 per cent payout ratio. “I definitely think much bigger dividends are on the horizon,” he said.
Portfolio manager at Milford Asset Management, Will Curtayne, said the write-back of bad debts was the key surprise in the update, and it would allow the bank to lift its dividend, albeit not dramatically. “That just drives their capital ratio up and gives them room to pay some more dividends,” he said.
Westpac also lifted its economic outlook assumptions, based on the faster-than-expected recovery and gains in employment. While in September it was expecting a small fall in house prices this year, it is now forecasting a 4 per cent rise in prices in 2021, followed by a 10 per cent gain next year.
After the Reserve Bank this week acknowledged the risks of very cheap credit and rising house prices, Mr King played down the chances of regulators intervening with credit restrictions, known as “macroprudential” policies, anytime soon.
“I’m sure that the regulators will continue to look at it and if prices continue to go up, they may look at macroprudential, but that doesn’t feel like it’s close,” Mr King said.
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