Westpac profit dips as costs bite but beats estimates as credit quality improves

Australia's Westpac reported a 2% decline in annual profit to A$6.99 billion for the year ended September 30, yet exceeded analyst expectations of A$6.83 billion. This performance was driven by improved credit quality and robust non-interest income, which counteracted a 9% rise in operating expenses and a 1 basis point dip in net interest margin due to competitive pressures. Concurrently, the bank announced an agreement to divest its A$21.4 billion RAMS mortgage portfolio to a consortium including Pepper Money, KKR, and PIMCO.

Analysis

Westpac (WBC) reported a 2% decline in annual net profit after tax to A$6.99 billion for the year ended September 30, yet this figure surpassed the Visible Alpha consensus estimate of A$6.83 billion. This outperformance was primarily driven by better-than-expected credit quality, with impairment charges improving to 5 basis points, and stronger non-interest income. These positive factors helped mitigate the impact of a 9% increase in annual operating expenses, which reached A$11.9 billion.

Operating expenses were significantly impacted by A$273 million in one-off restructuring charges, alongside higher technology and transformation costs, and wage growth. Despite these cost pressures, the bank's net interest margin (NIM) saw only a marginal 1 basis point decline to 1.94%, reflecting persistent competition in lending and deposits. The improvement in credit quality suggests easing cost-of-living pressures for households and sustained low business stress levels.

In a strategic move, Westpac announced the divestment of its A$21.4 billion RAMS mortgage portfolio to a consortium including KKR and PIMCO, signaling potential balance sheet optimization. Concurrently, the bank declared a final dividend of 77 Australian cents per share, a slight increase from 76 cents a year prior, indicating a continued commitment to shareholder returns despite the profit dip. The overall sentiment for WBC is mildly positive (0.35), reflecting the beat on estimates and strategic actions.

Key Decisions for Investors

• Investors should consider the implications of Westpac's strategic divestment of the RAMS mortgage portfolio for future capital allocation and operational efficiency.
• Monitor Westpac's ability to manage ongoing operating expense growth, particularly technology and wage costs, against the backdrop of competitive net interest margin pressures.
• Evaluate the sustainability of improved credit quality and non-interest income contributions as key drivers for future earnings stability, alongside the consistent dividend payout.