Westpac group has announced that its impairment charges for the first half of the 2020 financial year (1H20) are expected to total $2.2 billion, over 70 per cent ($1.6 billion) of which relate to additional charges associated with the ongoing COVID-19 crisis.
According to Westpac, the $1.6 billion in additional impairment charges reflect the following assumptions:
- significant changes to base case economic forecasts linked to the COVID-19 pandemic, including lower economic growth, higher unemployment, lower investment and a fall in residential and commercial property prices
- an increase in the weighting applied to the downside economic scenario, reflecting a higher probability that economic conditions could deteriorate further; and
- an overlay based on a top down, industry-by-industry assessment of additional stress that could emerge in relation to COVID-19.
The additional charges are set to reduce the group’s common equity tier 1 capital ratio by 11 bps.
Total impairment charges for 1H20 of $2.2 billion equate to approximately 62 bps of gross loans, up from 13 and 9 bps in 2H19 and 1H19, respectively.
However, Westpac noted that it is prepared to reassess its provisioning to account for any future impacts of the COVID-19 crisis, which it said “remain highly uncertain”.
Westpac CEO Peter King commented: “The world is going through a once in a lifetime health and economic crisis, and we are committed to assisting as many customers as possible to bridge this shutdown period. Our packages are already providing relief to individual and business customers.
“It is, however, unfortunate that some customers will not be able to navigate the financial and economic changes of this crisis and may not re-open.
“Nevertheless, we will work closely with those customers to help them through that process.”
Mr King concluded: “Having materially strengthened capital over the last decade, building significant buffers, we are well positioned to absorb this increase and respond to future developments in the environment.”
Westpac’s announcement follows the release of NAB’s 1H20 results, in which the bank reported a 51.4 per cent slide in cash earnings, from $2.9 billion in 1H19 to $1.4 billion.
The earnings slide was driven by a 156.8 per cent increase in credit impairment charges, from $449 million to $1.16 billion.
In response to the “material impact” of the COVID-19 crisis on the group’s balance sheet, NAB launched a $3.5-billion capital raise to shore up its funding position.