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Westpac’s asset quality to ‘deteriorate’

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.

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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]

Westpac’s asset quality to ‘deteriorate’
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