Westpac Banking Corp (ASX: WBC) confirmed the worst kept secret this morning, cancelling its first-half dividend after deferring the payment in May.
This came despite reporting a $1.32 billion third-quarter cash profit, up 19% on 2019, and a 40% reduction in loan repayment deferrals from 135,000 to just 78,000.
The company saw net interest income decline by 3% as its net interest margin, effectively the profit margin on every loan, fell by another 0.08% to 2.05%.
Management increased impairments by $826 million on the expectation of worsening recovery rates on deferred mortgages.
Westpac pointed the blame for falling profits on the low interest rates pervading markets, an issue shared by each of the majors and unlikely to disappear anytime soon.
Expenses increased by 1% as the continued Anti-Money Laundering and AUSTRAC issues require additional compliance costs and a hefty fine.
Importantly, the group’s capital ratio was flat at 10.8% as growing profits offset the growing loan book, however, any dividend would likely have required a capital raising to maintain current levels.
One of the more interesting takeaways from the banking sector updates has been their success in moving customers back to Principal and Interest loans from Interest Only, in Westpac’s case, down from 27% in September 2019 to 21% in June. Unfortunately, this trend is likely to reverse on ASIC’s recent guidance.
Summary: Dividend cut a disappointment but ultimately the right decision for a sector seeking to recapitalise.
For a detailed write-up on Westpac third-quarter update, check out this article from Rask Media’s Jaz Harrison: FY20 Q3: Westpac (ASX:WBC) cancels dividend
This article was written by Drew Meredith, Financial Adviser and Director of Wattle Partners. To get in contact with Drew, click here to visit the Wattle Partners website.