End Of The High-rise Days, Says Bank Boss

Sydney Morning Herald

Friday May 2, 2008

Danny John

THE recently installed Westpac chief executive, Gail Kelly, has declared an end to the most recent golden age of banking profit growth, even though the country's oldest bank is on target to increase its earnings almost 10 per cent this year to $3.8 billion.

With the economy slowing under higher interest rates and and the global credit crisis rippling through balance sheets, Ms Kelly indicated yesterday that the era of high-profit rises since the early 2000s was over.

"I think those days have changed," said Mrs Kelly, as she suggested that loans advanced to the housing and business sectors would fall from high double-digit percentage growth to even single figures in the case of mortgages.

Unveiling her first set of half-year figures that showed a $160 million rise in interim cash earnings to $1.84 billion, the former St George boss forecast that slower loan growth and higher bad debt charges would take their toll on the industry.

However, she predicted that the recent increases in interest rates, aimed at keeping a lid on inflation, were nearing the end and that the next move by the Reserve Bank could be downwards, even though that might still be some months away.

As a result, she expected that a strong Australian economy was in for a soft landing and would avoid a recession, but growth would be slower.

That was underlined by Westpac's results, which showed profits over the two most recent half-years - as opposed to the corresponding interim result 12 months ago - were flat, with a $10 million rise on the $1.829 billion to the end of September.

The bank's revenue rose 12 per cent in the past year on the back of soaring business and personal lending, but the higher cost of funding caused by the credit crunch and provisions for corporate bad debts held back further significant rises in earnings.

Westpac revealed that its financing bill from borrowing at much higher rates of interest from international credit markets had cost it an extra $115 million, and sour corporate loans accounted for a further $183 million.

In all, the bank set aside an additional $201 million for potential bad debts in the first half, taking its total provisions to $1.9 billion - $500 million less than rival ANZ, which has encountered a rougher ride in the corporate lending stakes.

Large chunks of Westpac's $183 million cover are made up of loans extended to Centro and the debt-laden Allco Finance Group, but the bank also disclosed a $30 million provision for a "single" margin lending client. It refused to identify the exposure.

Together, the provisions ate into the first half contribution of Wespac's key institutional banking division, and its profits dropped $16 million, or 6 per cent, to $260 million.

The knock-on effects of the credit crunch also sliced through equity markets and took with them 10 per cent of the earnings of the bank's wealth management arm, BT Financial, which fell to $194 million.

But strong performances from the retail division, now headed by Ms Kelly's former St George ally Peter Clare, and the business banking operation with combined profits of almost $100 million helped counter the falls elsewhere and push cash profits up 10 per cent. That was despite the higher cost of mortgage financing, Westpac having increased home loan rates to just under 9.5 per cent.

The market greeted with relief the overall result and an 11 per cent increase in the interim dividend to 70c a share, and analysts at Deutsche Bank predicted net profits of $3.82 billion for Westpac for the current year. Westpac's shares closed 6c up at $24.55.

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