Westpac ditches cost-cutting target, says profit margins to thin

By Byron Kaye and Roushni Nair

(Reuters) -Australia’s Westpac Banking Corp on Monday threw out a cost-cutting target citing inflation and flagged thinner profit margins going ahead, but investors pushed its shares higher after it handily beat expectations for first-half profit.

CEO Peter King said inflation was pushing up overheads as the 206-year-old bank abandoned a target in place since 2021 to bring annual costs down to A$8 billion by 2024 and which had been subsequently increased to A$8.6 billion.

“We’re going to see services inflation pretty sticky,” King said on a call with analysts and media, noting that the employer of 38,500 people had raised wages 4% during the period, more than Australian payrises of recent years which have tracked inflation below 3%.

“In terms of costs, they’re not going to reduce,” King added.

Westpac also joined local rivals ANZ Group and National Australia Bank as well as Singapore’s DBS Group in warning about the outlook for net interest margins (NIMs) as interest rate cycles near peaks.

Australia’s No. 2 mortgage provider said NIM – interest earned from loans minus interest paid for deposit accounts – inched up 0.05% to 1.96% for the six months to March.

But that was below an average of 2.01% from analysts’ forecasts compiled by Visible Alpha, and the bank warned the figure would likely narrow in the second half as the cost of wholesale borrowing increased.

The first half saw Westpac’s income leap 22% from the same period a year earlier to A$4 billion ($2.7 billion), its best half-year result since 2018, helped by higher interest rates.

That compares with a consensus estimate of A$3.8 billion published by Visible Alpha.

Westpac shares closed 2% higher, ahead of a broader market advance of 0.8%, as the market cheered the better-than-expected profit.

“Overall, the result was likely better than feared,” Jarden analysts said in a client note, but they added that dropping the cost-cutting target “does suggest some additional downside for earnings.”

Costs for Westpac came to A$5 billion for the half, down from A$5.2 billion a year earlier. In prior years, the bank’s costs for the first and second half of a year have been similar.

The bank now plans to publish its cost-to-income ratio to illustrate its performance in comparison to competitors.

The results highlight how the market for mortgages, the bedrock of Australian retail bank earnings until recently, has become so tough that most large lenders have said they will focus on other business to lift profit.

Westpac plans to redirect resources to institutional banking and to financing the transition from fossil fuels to renewable energy, King said, without giving specifics.

Westpac declared an interim dividend of 70 Australian cents per share, up from 61 Australian cents last year.

($1 = 1.4810 Australian dollars)

(Reporting by Byron Kaye in Sydney and Roushni Nair and Upasana Singh in Bengaluru; Editing by Sumeet Chatterjee and Edwina Gibbs)