Westpac’s asset quality to ‘deteriorate’

Moody’s Investors Service says Westpac’s half-yearly results are “credit neutral”, but the major bank’s asset quality is likely to come under further pressure in the months ahead.

The credit ratings agency said a worsening outlook for the residential property market and the possible negative impacts of “elevated exposure” to investor lending in its 2014-15 loan portfolio were among the “multiple headwinds” that it expected to place further pressure on Westpac’s asset quality profile.

While these headwinds appeared to be well-contained by the bank at present, Moody’s expected Westpac’s asset quality metrics to “deteriorate gradually” over the course of 2016.

However, Moody’s noted that Westpac retained considerable flexibility to preserve its credit standing, with its profitability remaining strong and its stable balance sheet settings for the first half of 2015-16 “preparing it well for a period of increased uncertainty”.

“The latest result was also affected by a material rise in the bank’s impairment charge due to a small number of large stressed clients and the continued weakness of the institutional division’s net interest margin,” Moody’s senior vice president Ilya Serov said.

Westpac reported cash earnings of $3.9 billion for the first half of 2015-16, down 3 per cent from the same period 12 months prior, but up 3 per cent on the second half of 2014-15.

The bank’s pro forma Common Equity Tier 1 (CET1) ratio is now 9.2 per cent, which is broadly in line with Westpac’s peers, according to Moody’s.

Moody’s said the group’s self-reported and internationally comparable CET1 ratio of 14.7 per cent is above the global median and, as a result of increased capital, Westpac’s return on equity has fallen sharply to 14.2 per cent from 15.8 per cent a year ago.

[Related: Westpac boss warns of rising bad loans]

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