Westpac drops out as CEO raises cost projection, signals uncertainty

(Bloomberg) – Shares of Westpac Banking Corp. fell the most since June after CEO Peter King said costs would be higher than expected in 2024 amid inflation and economic uncertainty.

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The stock fell 3.6% on Monday morning in Sydney after full-year profit hit analysts’ estimates. Westpac has raised its 2024 cost target by A$600 million ($386 million) to A$8.6 billion.

“As we approach the new year, there is an increase in economic uncertainty and volatility in financial markets,” King said in a statement. “While supply chain constraints are easing, skilled labor remains hard to find. The biggest challenge for the authorities is to contain the psychology of high inflation that is now taking hold in the economy.

Australia’s largest banks are benefiting from rising interest rates which are boosting lending profitability. But with the economy set to slow next year and fears of an accelerating housing market downturn, investors are aware of the stress on households that could weigh on lenders’ outlook.

Cash income fell to A$5.28 billion in the year to September 30, according to a statement from the Sydney-based lender on Monday. That met the average expectation of A$5.25 billion in a Bloomberg survey of 12 analysts.

With mortgage rates rising rapidly this year, there are still few signs of pain for borrowers, although next year will likely see fixed-term home loans come due and the impact of rising rates looming large. will feel more intensely, King said.

“We’re not seeing an increase in hardship or stressed assets yet,” he said. “Many customers have built up savings over the past two years and 68% are staying ahead of their mortgage payments. However, it is inevitable that the impact of higher rates will be felt, including when borrowers’ low fixed rate loans are rolled over.

Cost reductions

While Westpac raised its cost target for 2024, the bank said spending in the first half of 2023 is expected to be 0% to 2% lower. As part of King’s efforts to simplify banking, Westpac has completed or announced the sale of nine businesses, according to the release.

“After the hard work of the past two years, Westpac is now a simpler, stronger bank,” King said. “We continue to reduce our costs. The company will also pay a final dividend of 64 Australian cents per share.

What Bloomberg Intelligence says

“Westpac’s 2023 earnings are expected to rise after the 5bps margin hike in 2H22, it is the most sensitive to rising rates among the major Australian lenders we cover. Cost control could also help, but credit looks likely to normalize after the steepest depreciation in 2H. The bank remains well capitalized, which will support management’s dividend payout target of 60-75%.

Matt Ingram – Senior Industry Analyst at Bloomberg Intelligence

Rival National Australia Bank Ltd. is expected to report results on Wednesday, while Australia & New Zealand Banking Group Ltd. started the earnings season for the biggest lenders last month.

(Redesigns and updates with stock price from the first paragraph.)

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