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Westpac braces for 63% surge in credit losses

The major bank’s cash earnings have plunged by 70 per cent, triggered by a spike in provisions associated with the COVID-19 crisis and one-off costs relating to AUSTRAC action.

Westpac Group has released its half-year results for the 2020 financial year (1H20), posting a 70 per cent slide in cash earnings after tax to $993 million.

The group’s earnings have been hit by a $1.6-billion increase in credit provisions associated with the COVID-19 crisis and one-off charges ($1.02 billion) related to AUSTRAC’s investigation into the bank’s alleged breaches of anti-money laundering laws.

Westpac’s credit provisions total $5.8 billion, reflecting expectations of a 63 per cent spike in credit losses, from $2.74 billion in 2H19 to $4.47 billion.

The bank has revealed that it has provided COVID-19-related repayment relief to approximately 6.5 per cent of its home loan customers, representing $39 billion in loans.

Approximately 14 per cent of deferrals are for mortgages with a loan-to-value ratio (LVR) of between 80 to 90 per cent, with 8 per cent of deferrals on loans with an LVR exceeding 90 per cent.   

Westpac Group CEO Peter King acknowledged that the result was the “most difficult result Westpac has seen in many years” but claimed that the bank remains well placed to withstand the crisis.

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“We are well capitalised, and our liquidity and funding metrics are comfortably above regulatory requirements,” he said.

Mr King stressed that Westpac would continue to support the flow of credit in the economy to help facilitate a broader economic recovery.

“It is vital that when we get to the recovery phase, businesses are ready to reopen and support as many Australians back into work as possible,” he said.

As a result of the group’s performance, Westpac has joined ANZ in deferring a decision on its dividend payment to shareholders, to ensure it retains sufficient capital.  

Home lending breakdown

Westpac has become the third major bank to record a contraction in its mortgage portfolio over 1H20, down $1.5 billion, from $447.2 billion to $445.7 billion.

Settlements were flat when compared with 1H19 at $30.4 billion.

The bank reduced its portfolio’s exposure to investment home loans over the period, down from 39.1 per cent in 1H19 to 37.6 per cent and make up just 29.4 per cent of new lending.

The share of interest-only loans as a proportion of Westpac’s total portfolio also fell, down from 30.6 per cent to 23.4 per cent. Interest-only loans make up just 16.4 per cent of Westpac’s home loan flows.

The group also reported an increase in the share of broker-originated loans, up from 43.7 per cent of its portfolio to 44.7 per cent.

Westpac also settled a greater number of loans via the third-party channel in 1H19, up from 45.6 per cent to 47.3 per cent.

The average loan size settled by Westpac in 1H20 was approximately $393,000, up from $375,000.

Westpac to spin off wealth business

As part of a broader simplification strategy, Westpac has announced that it will move its wealth products and services into a new “specialist businesses” division.

“We have several businesses where we don’t have sufficient scale or where the returns are insufficient for the risk,” Mr King said.

“These include wealth platforms, superannuation and retirement products, investments, general and life insurance and auto finance.”

The group’s Westpac Pacific business will also be moved to the new division to “simplify the institutional bank portfolio”.

The new division will be led by Jason Yetton, who has been appointed as chief executive, specialist businesses, effective 18 May.

Mr Yetton rejoins Westpac after serving as CEO of Commonwealth Bank spin-off NewCo from December 2018 to April 2020.

“These are good businesses with strong franchises and will benefit from being in their own division under the leadership of Jason who will bring his considerable energy and skills to the role,” Mr King added.

Mr King revealed that over the coming months, Westpac would “conduct a detailed strategic review” on the “best options” for the businesses, which would include potential sales.

“The changes today are a significant step to reducing the complexity of our portfolio and will allow the group executives to focus on improving performance in our Australian and New Zealand banking businesses,” Mr King concluded.

[Related: ANZ defers $36bn in mortgages, prepares for loss]

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