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In a research report released Monday, Morningstar analyst David Ellis said that investor concerns – centred on Westpac’s large exposure to residential mortgages – are “overdone”.
“Certain commentators view Westpac’s successful home loan growth strategy as a key weakness, but we argue it is a core strength,” Mr Ellis said.
On Monday Westpac reported its first-half fiscal 2015 profit results, which showed loans up seven per cent.
“Market competition continues to pressure net interest margins, but with the strong pricing power enjoyed by the big four banks, we expect Westpac to maintain underlying margins at about two per cent,” Mr Ellis said.
The Morningstar report noted that the quality of Westpac’s residential loan book continues to improve with historically low rates keeping a lid on mortgage delinquencies.
“Looking forward, internal stress testing on the mortgage portfolio estimates cumulative total losses of $2.3 billion over three years for the uninsured home loan portfolio,” it said.
The stressed scenario includes unemployment rising to 11.6 per cent, house prices tumbling 26 per cent and the economy falling into recession. In addition, Westpac estimates cumulative claims on lender mortgage insurance of $879 million over three years, Morningstar noted.