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Rate cuts not the solution: Westpac CEO

Interest rates are “not the problem”, Westpac CEO Brian Hartzer has said, calling for a holistic regulatory approach to subdued market conditions, amid a 24 per cent slide in the group’s profits.

Westpac Group has released its results for the first half of the 2019 financial year (1H19), reporting a statutory net profit of $3.17 billion, down 24 per cent from $4.19 billion in 1H18.

Westpac CEO Brian Hartzer said the underlying result was “disappointing” and reflected weakening business conditions, remediation costs and the revision of the group’s wealth strategy.

“The past six months has been a turning point for the bank,” Mr Hartzer said.

“We are proactively addressing legacy issues while improving our products and services to ensure they deliver the right customer outcomes.”

Reflecting on economic trends, Mr Hartzer noted that economic conditions are “softening” but remain in “reasonable shape”.  

Despite expressing confidence in the Australian economy, the chief executive acknowledged the need for economic stimulus, noting that Westpac expects the Reserve Bank of Australia (RBA) to cut the official cash rate twice in 2019, particularly off the back of flat inflation data.  

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However, Mr Hartzer called on regulators and policymakers to consider alternative measures to stimulate the economy.

“Interest rates are not the problem,” he said. “It is true that a reduction in the cash rate will help a bit on consumer spending, but the question we should be asking is how do we get businesses to invest in growth and hire people, which would raise wages and support spending.”

He continued: “We must drive policy changes that incentivise investment, improve productivity and build business and consumer confidence.

“That means tax reform, reducing red tape, providing policy certainty and having regulations that make it easier for businesses to borrow.”

The RBA’s monetary policy board will meet later today to determine the May cash rate, with some analysts expecting the central bank to cut the cash rate for the first time since August 2016.   

Mr Hartzer expects the current market environment to continue placing pressure on the bank’s bottom line.

“Lower demand for credit and low interest rates will put continued pressure on margins,” he said.

“Earnings growth will therefore be challenging; we’ll need to remain disciplined on margins and costs and targeted on where we grow.

“There is some continued uncertainty about regulation and elevated risk and compliance costs will persist for some time. 

He added: “Pressure is increasing from customers and new competitors, so having a strategic response to disruption is imperative.”

Mortgage volumes down

According to Westpac’s 1H19 results, the group reported mortgage portfolio growth of approximately $10 billion, with its book rising from $437.2 billion in 1H18 to $447.2 billion in 1H19.

However, the group’s portfolio growth was subdued when compared to the previous corrupting period, which saw its book rise by approximately $23 billion from $414 billion in 1H17.

Further, over the six months to 31 March 2019, Westpac settled $30.1 billion in home loans, down from $38.4 billion in the previous corresponding period.

Mr Hartzer said weaker mortgage growth was partly attributable to enhanced competition in the mortgage market, with the chief executive also noting the continued weakness in demand for credit.

Mr Hartzer said that alternative finance providers were benefiting from the tighter regulatory conditions imposed on authorised deposit-taking institutions (ADIs).

“We’re seeing very aggressive growth in the home market from foreign banks and non-banks,” he said.

“There are a couple of interesting aspects here in terms of a level playing field, where the non-banks don’t have the same regulations applied to them as the ADIs do. 

“[Our] sense is that the regulators have focused initially on the big four banks, understandably because we’re a large part of the volume.”

Mr Hartzer continued: “[That has] led – based on the feedback we get from brokers and others – to some disconnects in terms of the process thats being required by large banks versus the process thats being required by smaller banks.”

However, the Westpac CEO said that he expects the perceived regulatory discrepancies to be “ironed out”, claiming that regulators “dont like distortions in the market”.

Westpac’s 1H19 results also revealed that the group has continued to reduce its exposure to investment and interest-only borrowers, despite the lifting of the Australian Prudential Regulation Authority’s (APRA) caps.

The proportion of investment loans in Westpac’s mortgage book declined from 39.5 per cent to 39.1 per cent and made up 37 per cent of Westpac’s home loan flows over 1H19. 

As at 31 March 2019, interest-only loans made up 30.6 per cent of its portfolio, down from 39.6 per cent in 1H18, and made up just 18.5 per cent of its mortgage flows in 1H19.

Additionally, Westpac reported that the share of home loans originated through its proprietary network remained relatively stable, falling from 56.5 per cent of its portfolio as at 31 March 2018 to 56.3 per cent.

[Related: Macquarie bucks trend with 18% mortgage growth]

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