The Westpac Banking Corp (ASX: WBC) share price has risen by 5% after the bank reported a strong recovery of its underlying profit in the first quarter of its 2021 financial year.
Banks continue to face a difficult operating environment with the COVID-19 pandemic still affecting certain areas of the economy. However, Westpac has shown that parts of the economy are now doing much better than in the second half of FY20.
Westpac's FY21 first quarter profit
Westpac reported that its unaudited statutory net profit was $1.7 billion, up significantly from the FY20 second half quarterly average of $550 million.
It also revealed that it made cash earnings of $1.97 billion for the quarter, up strongly from the FY20 second half quarterly average of $808 million. Excluding notable items, cash earnings grew by 54%.
Those notable items included provisions for the AUSTRAC proceedings, refunds, payments, costs and litigation, write-down of intangibles and asset sales and revaluations. The AUSTRAC provision caused a hit to the Westpac share price when the market first learned of it.
A key reason for the increase in profit was an impairment benefit of $501 million from improved credit quality, the stronger economic outcomes and a better economic outlook.
The big four ASX bank also said that core earnings were up 28%, or 3% excluding notable items.
Westpac's net interest margin (NIM) was 2.06%, this was an increase of 3 basis points from the second half of FY20 (up 2 basis points excluding notable items).
Westpac's loan book and credit quality
The big bank said that credit quality has improved and there were no new large individually assessed provisions. The percentage of stressed assets to total committed loan exposure fell 15 basis points, with almost all industry segments improving. Consumer delinquencies of more than 90 days were lower over the quarter, including Australian mortgages that were overdue by more than 90 days falling by 16 basis points to 146 basis points.
Looking at the deferrals, the total continues to decline. At 31 January 2021, $11 billion of Australian mortgages were still being deferred. The Westpac share price has steadily climbed more than 40% over the last six months. A significant roll-off of deferrals is expected over February and March.
There was also $400 million of business loans still in deferral at 31 January 2021, which represents less than 1% of the small business portfolio.
Balance sheet strength
Westpac reported that its balance sheet was strong, with its common equity tier 1 (CET1) ratio increasing by 74 basis points quarter on quarter to 11.9%.
CEO commentary
The CEO of Westpac, Peter King, said: "It has been a good start to the year with higher earnings, a stronger economy, and solid progress on our fix, simplify and perform strategic priorities.
"While uncertainty remains around the impact of local COVID outbreaks, there is cause for optimism. The economy is recovering, consumer and business confidence is strong, and the labour market has been much more resilient than expected. At the end of December there were 12.9 million employed Australians compared to 13 million in March 2020."
Initial reaction
The market has had its say by sending the Westpac share price up by more than 5% so far today.
Some analysts have also had their say in the result. As quoted in the Sydney Morning Herald, Morningstar analyst Nathan Zaia said:
The market had been concerned Westpac's loan book was worse than rivals, but the update and an improvement in arrears rates had allayed those fears. Markets had also worried Westpac had a weaker capital position than rivals, but the update showed it was now sitting on significant surplus capital…I definitely think much bigger dividends are on the horizon.
