Westpac Bank reports better than expected interim results

Westpac Bank’s first half cash earnings of $3.195bn is slightly better than market expectations – though only slightly – but more importantly it probably means full year earnings estimates by the market don’t need to be hosed down further, as they were after the first quarter result.

The numbers imply an improvement in the second quarter by around $145m in cash earnings which is higher than ANZ Bank’s second quarter earnings gains reported yesterday. Fully franked dividends of 82 cents per share are also slightly above market expectations.

Returns on equity are still above 15% which is in line with where ANZ stands. Yesterday, we said it is probably best to sell out of ANZ and buy some Westpac and we feel on these numbers, that trading strategy is probably one which will pay off today.

Under the bonnet, customer deposits were 11% higher which is important for funding security. The rate of deposit growth has outstripped lending growth of only 5% but it hasn’t come at a huge cost to net interest margins, which shed 4 basis points compared to the same period last year.

Mortgage arrears are in line with September levels and down on the same period last year, impaired assets are also improving so asset quality isn’t an issue for now and last week’s 50 basis point RBA cut will help further.

Bottom line: A lot has been said about the Australian banks and how vulnerable they might be in the current market climate, but what today’s scorecard from Westpac shows is an ability to grow earnings, manage margin pressure and maintain loan quality in very tough economic conditions.

Returns on equity are still better than regional peers and the 82 cent per share dividend represents a yield of 3.6% on yesterday’s closing price and that’s just for six months – not bad given falling rates across the economy.

We expect Westpac to regain some favour from the market after this result, even if that doesn’t occur today. Top line growth isn’t the best but it isn’t disastrous either and we think more than factored into the share price.