The Westpac Banking Corp (ASX: WBC) share price will be on watch on Monday after the banking giant revealed a sharp drop in half year earnings and deferred its interim dividend.
What did Westpac announce?
For the first half of FY 2020, Westpac posted a statutory net profit of $1,190 million and cash earnings of $993 million. This represents 62% and 70% declines, respectively, over the prior corresponding period. Cash earnings per share were down 71% to 28 cents.
Cash earnings excluding one-offs would have been $2,278 million, down 44% on the first half of FY 2019. On a per share basis, excluding one-offs, cash earnings would have been down 36% to 64 cents.
The banking giant's results were of course impacted by the previously announced impairment charge of $2,238 million. This was an increase of $1,905 million from the prior corresponding period and includes potential impacts from the COVID-19 pandemic.
One small positive was the bank's net interest margin was resilient and increased 1 basis point to 2.13% despite the Reserve Bank's rate cuts.
At the end of the period its return on equity was down to 2.9% and its CET1 capital ratio stood at 10.8%.
Dividend decision deferred.
In light of this poor performance and the uncertainties it is facing, the Westpac board elected to defer its decision on the interim dividend until a later date.
It explained: "Westpac remains well provisioned and capitalised. Nevertheless, the Board recognises the uncertain economic and operating conditions and how these may develop over the next six months. The Board also accepted APRA's consistent guidance on dividends and being prudent at this point in time. Westpac has kept APRA informed about its stress testing scenarios and capital position. Westpac has not received any concerns from APRA on the bank's capital position. The Board will continue to review dividend options over the course of this year."
How did its businesses perform?
The Consumer segment reported cash earnings of $1,410 million, down 14% on the prior corresponding period. It was impacted by higher impairment charges and higher insurance claims associated with the bushfires and severe weather events. Lending was down $2 billion over the year, mostly in credit cards and mortgages.
The Business segment posted a 51% decline in cash earnings to $604 million. This was driven predominantly by higher impairment charges linked to the economic outlook because of COVID-19. Net interest income was down 2% from a decline in loans and margins.
The Westpac Institutional Bank segment posted a 68% decline in cash earnings to $175 million. This was also largely down to higher impairment charges because of COVID-19.
Finally, the Westpac New Zealand segment recorded a 47% drop in cash earnings to NZ$275 million. A combination of higher impairment charges, lower non-interest income, less asset sales, and a 13% increase in expenses weighed on its result.
Outlook.
The company's new CEO, Peter King, commented that COVID-19 was a once-in-a-lifetime health crisis that has now become an economic crisis.
He said: "Australia still faces a sharp economic contraction in 2020 with a solid rebound not expected until the December quarter. Our economists believe the unemployment rate will peak at 9 per cent in June but would have been much higher in the absence of the JobKeeper Payment. We forecast the rate to drop to around 7 per cent by the end of the year."
"Business and consumer confidence have fallen sharply. A sustained recovery cannot be expected until the December quarter, although we expect caution to prevail well into 2021. House prices are expected to fall through the remainder of 2020, reversing the recent recoveries, particularly in Sydney and Melbourne," Mr King said.
He added: "While the rest of the world is also facing significant economic disruption, Australia's exports will likely benefit from the recovery in the Chinese economy. Unfortunately, ongoing international travel restrictions will continue to flatten inbound tourism and impact foreign student arrivals."
Nevertheless, the chief executive believes Westpac is well capitalised and has ample liquidity to continue to support its customers during this tough operating environment.
"Importantly, while the remainder of the year will still be challenging, Westpac is well placed to continue to support customers through this difficult time," Mr King concluded.
