The Westpac Banking Corp (ASX: WBC) share price is up 2.51% in morning trade after releasing its FY22 first quarter update showing a large jump in statutory net profit.
Westpac’s FY22 first-quarter result
The big four bank reported that in the three months to 31 December 2021, it made $1.82 billion of statutory net profit. That was an increase of 80% on the quarterly average for the second half of FY21.
Cash earnings came in at $1.58 billion, which was an increase of 74%.
However, excluding ‘notable items’, cash earnings only increased 1%. Part of the profit growth was offset by the absence of revenue generation from businesses sold, particularly insurance.
Lending continued to grow. Across institutional, mortgages and New Zealand, lending was up $5 billion (or 0.7% in percentage terms).
Westpac said that its net interest margin (NIM) was 1.91%, down 8 basis points (0.08%) due to competition in mortgage and business lending and higher liquid assets.
NIM is the interest rate it lends compared to the cost of the bank’s funding (like savings accounts).
Positively, Westpac has also been working on reducing its expenditure.
Total expenses fell 26% to $2.7 billion, though excluding notable items it was a drop of 7%.
Westpac is seeing some of the benefits of its simplification programs to reduce costs.
It reduced its headcount by more than 1,100 people. Those declines were despite further investment in the business and ongoing programs to improve the management of risk.
The company is aiming to cut costs by $8 billion by FY24. This could be a helpful boost for the Westpac share price.
Loan book performance
Westpac said that its profit was partially offset by a turnaround in impairment charges. It recorded an impairment charge of $118 million, mostly from increased ‘provision overlays’ reflecting continuing COVID-19 related uncertainty.
In other words, Westpac is cautiously expecting more bad debts. The FY21 second half quarterly average was a credit benefit of $109 million, so a bit of a negative turnaround there.
The bank did say that its asset quality metrics continue to improve. Stressed assets as a proportion of total committed exposures were down 21 basis points (0.21%) to 1.15% and mortgage delinquencies were lower.
Westpac noted that while some customers continue to find conditions difficult during the COVID-19 wave, it hasn’t translated to observed new stress in the portfolio.
Capital
The bank ended with a common equity tier 1 (CET1) capital ratio of 12.2%, comfortably above APRA’s new 10.25% benchmark for the major banks.
Westpac said it’s currently doing an off-market buy-back of up to $3.5 billion.
It will go to an on-market buy-back if there isn’t sufficient demand.
Final thoughts on Q1 and Westpac share price
Westpac said that it’s expecting the NIM to decline further through FY22 because of competitive pressures. That’s not a positive development for the profit.
It looks like the cheapest big four banks at the moment, but that may not mean it’s the best one to buy.
Westpac could pay an attractive dividend yield over the next 12 months, but there are other ASX dividend shares that I think have longer-term growth potential.
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