The Westpac Banking Corp (ASX: WBC) share price is on watch after revealing it made $1.8 billion of net profit.
Westpac share price
FY23 Q3 update
The ASX bank share said the quarter was “characterised by resilient operating revenue, assisted by ongoing disciplined margin management.”
Westpac didn’t give context of how the $1.8 billion performed year on year, but the quarterly average for the FY23 first half net profit was $2 billion, so the third quarter was a reduction of around 10% from that.
The bank had a CET1 capital ratio of 11.9% at the end of the quarter, compared to a target operating range of 11% to 11.5%. It also noted it had increased its provisioning, with the ratio of ‘collectively assessed provisions’ (CAP) to credit risk-weighted assets (RWA) up 4 basis points to 1.37%.
Westpac noted that credit quality was “resilient” in the third quarter, but there was a “modest” increase in stressed assets to 1.16% of its lending, a rise of 6 basis points (0.06%) from March 2023. Credit impairment changes to average loans were 0.12% for the nine months to June 2023.
Lending profitability
It said that the group net interest margin (NIM) was 2.06%, which was up 10 basis points (0.10%) compared to the first half of FY23. However, the ‘core’ NIM declined 4 basis points (0.04%) to 1.86%. Further reductions of the NIM could be bad news for the Westpac share price.
The NIM is important because it tells investors how much the bank is earning on its lending. One side of the equation is what rate it’s lending at (such as a mortgage) and the other side is the cost of where that money is coming from (like savings accounts).
Westpac said that the core NIM suffered due to ongoing mortgage competition, which was partially offset by higher earnings on capital and hedged deposits.
It also disclosed that the deposit to loan ratio improved to 84.1% in the third quarter, supported by customer deposit growth of $8.7 billion, while loans grew by $6.4 billion largely in owner occupied mortgages and business lending.
Expenses
Westpac said its costs in the second half of FY23 are up approximately 5% compared to the first half.
Inflation led to higher supplier costs and wages. It also continues to spend on its technology and ‘customer simplification’ program. The bank said it’s still committed to “cost discipline”, with cost reset actions leading to a reduction of full time equivalent employees of approximately 2%.
It also revealed the FY23 second half is expected to include one-off expenses linked to the reset program, as well as a one-off levy for the Commonwealth Compensation Scheme of Last Resort.
Final thoughts on the Westpac share price
A 10% fall in profit, a decline in the core NIM, more stressed loans and higher impairment charges – not a great combination.
Westpac is probably positioned strongly enough to ride through whatever happens next, but the outlook doesn’t look promising for profit growth. There are a number of other ASX dividend shares I’d rather buy for income first.
