Westpac profit down, bad debt stabilises

Westpac Banking Corporation says the bad debt cycle is stabilising and its business has strong momentum going into fiscal 2010, after Australia's second biggest lender reported a 10.7 per cent annual profit decline.

Shares in Westpac rose almost two per cent, leading the market higher, after the Sydney-based bank reported net profit of $3.446 billion for the 12 months to September 30, compared with $3.859 billion in the prior corresponding period.

Pro-forma cash earnings, the bank's preferred measure, taking out fluctuations based on unrealised losses on asset values, fell eight per cent to $4.627 billion, close to analysts' forecasts.

The pro-forma results treat St George as part of the group for the past two fiscal years.

"We believe we've built good momentum this year that will stand us in good stead as we go forward to 2010," chief executive Gail Kelly told journalists on Wednesday.

The results show that Westpac, like its three domestic rivals, has negotiated the financial crisis and downturn with limited damage to its profit.

The bank's profit, which was mainly hurt by bad debts in fiscal 2009, can only increase as impairments recede.

Westpac shares closed up 36 cents, or 1.42 per cent, at $25.79 after peaking during the day at $26.08, helping the benchmark S&P/ASX200 stock market index stay in the black and gain 0.19 per cent.

"All in all it was quite a good result," fund manager Ausbil Dexia chief executive and head of equities Paul Xiradis said.

"The commentary that went with it, particularly in regards to bad and doubtful debts and the likely peaking of that ... Westpac was fairly definitive, which is good for them and for the industry."

Ausbil Dexia manages about $10 billion dollars worth of assets, including Westpac shares.

Pro-forma revenue jumped 13 per cent to $16.76 billion, due to strong deposit growth and Australian mortgage growth as the bank increased its market share.

Mrs Kelly said Westpac's bad debts had been highest in the third quarter, and that was likely to be the peak.

"We've seen stabilisation but clearly there are more impairments to come through," she said.

Westpac's total provisioning for bad and doubtful debts rose to $4.38 billion in fiscal 2009, from $2.36 billion, on a pro-forma basis. Impairment charges almost tripled to $3.29 billion.

Impairments in the first half of fiscal 2008 were dominated by big corporate collapses - Allco, Babcock & Brown and ABC Learning - while the second half saw the effect of the economic slowdown hitting small to medium businesses.

That did not mean that Westpac would not increase lending.

"Credit growth is likely to continue," Chief Financial Officer Phil Coffey said.

But he warned that some customers would continue to face difficulties, particularly among medium sized businesses.

Westpac has increased its lending and deposit market share to the second biggest in Australia, after Commonwealth Bank of Australia Ltd, mainly as a result of its takeover of St George, completed in December 2008.

The integration was going smoothly and had achieved synergies - the value added to profit through cost savings in the merger - of $143 million, 19 per cent ahead of schedule.

Mrs Kelly said Westpac's merger with St George had been "transformational" and the bank wasn't actively looking for further takeover opportunities, at this stage.

"For the next couple of years, we've got a lot to do here," she said.

"Our primary focus is to drive our strategy and build up the platforms we have."

Over the longer term, Westpac would look at opportunities in Asia, particularly to support the operations of its existing customers, Mrs Kelly said.

But the bank said average funding costs probably would continue to rise due to intense competition for retail deposits and as wholesale funding is sourced at a cost well above pre-financial crisis levels.

Westpac reported that its Tier 1 capital ratio had increased to 8.1 per cent as at September 30, from 7.8 per cent 12 months earlier.

Westpac declared a final dividend of 60 cents a share, taking the full-year distribution to $1.16 a share, taking it back to the level of 2006 and down from $1.42 in fiscal 2008.