Westpac scraps first-half dividend due to uncertain outlook
Westpac has axed its first-half dividend due to the uncertain economic environment, as the coronavirus pandemic crunches profit margins and prompts the bank to build up its provisions for soured loans.
The banking giant said in a trading update on Tuesday that its unaudited profits during the June quarter were $1.32 billion, which was 19 per cent higher than the first half quarterly average, during which provisions for COVID-19 bad loans increased sharply.
Westpac CEO Peter King: "Westpac’s priority has been to remain strong."Credit:Alex Ellinghausen
But despite profits rising, the update still underlined the pressure on bank returns, with lower profit margins, signs of more customers falling behind on their repayments, and a flat capital ratio.
After Westpac suspended its interim dividend in May, the board has now decided it is prudent not to pay a first-half dividend at all, as the bank faces a highly uncertain outlook due to the coronavirus pandemic. It will consider dividends when it delivers full-year results later this year.
Chief executive Peter King said COVID-19 was clearly affecting the business, pointing to lower profit margins, weaker activity, and loans that have been deferred by customers.
“Westpac’s priority has been to remain strong so we can continue supporting customers through this challenging period," Mr King said.
“We have maintained our strong balance sheet and increased provisions for bad debts to support our prudent approach to managing impairments."
The decision not to pay a dividend stands in contrast to Commonwealth Bank, which last week paid shareholders the maximum dividend allowed by regulators, as it is holding surplus capital after asset sales. ANZ Bank will update investors on dividends on Wednesday, while Bendigo and Adelaide Bank said on Monday it would not pay a first-half dividend.
Westpac, which did not provide a cash earnings update for the same quarter last year, said unaudited cash earnings of $1.32 billion compared with a quarterly average of $500 million for the first half, in which it took hefty provisions for bad loans.
The bank's closely-watched common equity tier 1 capital was 10.8 per cent of risk-weighted assets, unchanged from the previous quarter.
Bell Potter analyst TS Lim said the flat capital ratio was probably why the board had decided not to pay a dividend. "When you compare them to the other banks, it's pretty low," Mr Lim said.
Westpac said the number of mortgages that had been deferred by customer had fallen from a peak of 135,000 to 78,000. The lender said it expected about half of its customers with deferred loans to return to making payments.Credit:James Alcock
Westpac said capital generated from earnings during the three months was largely soaked up by changes to its risk weightings - financial models that determine the riskiness of loans. This has the effect of requiring banks to set aside more capital at a time of rising financial stress.
As investors brace for a rise in bad debts, Westpac raised its provisions for expected credit losses increased by $574 million since March, due mainly to additional charges for deferred mortgages and higher-risk business loans, and deteriorating economic forecasts.
The bank said the number of mortgages that had been deferred by customer had fallen from a peak of 135,000 to 78,000. The lender said it expected about half of its customers with deferred loans to return to making payments.
“We continue to offer deferral support where needed, although following our three month customer check-ins the number of outstanding mortgage deferrals is down around 40 per cent. However, many mortgage and business customers continue to require assistance and we are committed to supporting them," Mr King said.
The proportion of mortgage customers that were more than 90 days behind on their repayments had lifted sharply to 0.149 per cent, an increase of 55 basis points.
In a sign of the crunch on bank profitability, the bank reported a sharp decline in its net interest margin, which compares funding costs with what it charges for loans. Westpac's NIM declined from 2.16 per cent to 2.05 per cent.