Westpac Banking Corp. expects pressure on net interest margin will continue amid heated competition in mortgage lending and the lingering pandemic, after its full-year cash earnings more than doubled.
The major Australian lender's NIM, a key profitability metric, narrowed by 4 basis points to 2.04% in the fiscal year ended Sept. 30 from a year earlier. The decline was due to a migration of mortgages to fixed-rate loans from variable-rate lending in an attempt to turn around the bank's shrinking share in the home loan market, CEO Peter King said at a Nov. 1 earnings call.
"For us and thinking about returns and margins in the medium term, I would hope that they're going to rise from here. I'm talking medium term, not next year. But that needs a different interest rate level to what we have in the economy today," King said.
Australia's central bank has kept its cash rate at a record low of 0.1% and signaled it will likely remain there until 2024.
Major Australian banks such as Westpac and ANZ have seen their share in the domestic mortgage market falling despite rising home transactions. Analysts said that was in part due to the aftershock from a string of scandals over their lending conduct and processes over the last two years. Customers are also turning to offshore banks or nonbank lenders for cheaper loans and faster approvals, analysts added.
Westpac's falling NIM was also due to mixed impact from a decline in personal lending, as well as reduced earnings on hedged capital and deposits, the bank said.
Boosting shareholder return
The bank announced plans to return A$5.70 billion to shareholders as its full-year cash earnings more than doubled.
The Australian lender's board agreed to buy back up to A$3.50 billion of its own shares off-market in the current fiscal year ending September 2022 to optimize its capital base and improve its per-share metrics and future returns. It will be in addition to a fully franked final dividend of 60 cents per share for the fiscal year ended Sept. 30, totaling A$2.20 billion.
Westpac is also well on its progress into simplifying its business portfolio and operations as part of its strategy to refocus on banking in Australia and New Zealand.
In the fiscal year ended Sept. 30, the bank completed five asset sales. It also announced three other deals that are expected to complete in the current fiscal year. It said all eight deals will benefit its CET1 ratio by 29 bps. The ratio stood at 12.3% as of Sept. 30.
The Australian banking group has identified remaining businesses for divestment but not under a sale agreement includes its Pacific business and its superannuation, investments and platforms operations.
In September, Westpac terminated all agreements in relation to the A$420 million divestment of its Pacific businesses to Kina Securities Ltd. Westpac will continue to operate its Pacific business while searching for other options.
The bank recorded cash earnings of A$5.35 billion for the fiscal year ended Sept. 30, up 105% year over year from A$2.61 billion. It posted a writeback on loan loss provisions totaling A$590 million as credit quality improved, compared to a charge of A$3.18 billion the previous fiscal year.
A fall in notable items also contributed to the earnings growth. There was no provision made related to its alleged violations of anti-money laundering and counterterrorism financing laws, compared to A$1.44 billion charge booked in the previous fiscal year. However, write-down of goodwill and other assets, mostly in its institutional banking segment, rose to A$1.16 billion from A$614 million, while remediation and litigation costs were largely flat at A$448 million.
