Westpac First-Half Profit Drops 6% as Bad Debts Rise

Westpac Banking Corp., Australia’s biggest lender by market value, said first-half profit fell 6 percent and announced its first dividend cut in 17 years after charges for bad debts tripled.

Cash earnings dropped to A$2.29 billion ($1.7 billion) in the six months ended March 31 from A$2.44 billion a year earlier, the Sydney-based bank said today, using pro-forma figures adjusted to reflect last year’s takeover of St. George Bank Ltd. Bad debts rose to A$1.61 billion from A$541 million. Westpac shares gained 2.3 percent to A$19.95 at 10:20 a.m. in Sydney.

Chief Executive Officer Gail Kelly, who led the purchase of Australia’s No. 5 lender St. George shortly after taking over last year, followed other local banks in reporting rising bad debts as the country nears its first recession in 18 years. She cut the dividend payout to preserve capital with defaults spreading from businesses to individuals as unemployment climbs.

Westpac “experienced a deterioration in credit quality, as all the banks have,” said Sean Fenton, who manages $324 million at Tribeca Investment Partners in Sydney. “The dividend cut may catch a few by surprise as they hadn’t pre-announced it.”

Westpac has gained 18 percent this year, outperforming a 12 percent advance in the six-member S&P/ASX 200 Banks Index.

The bank reported net income, which didn’t include St. George in the prior year, fell 1.2 percent to A$2.18 billion. Cash earnings exclude hedging costs and other one-off items.

Bad Debts

The bank will pay a dividend of 56 cents a share, down 20 percent from last year. That’s the bank’s first payout cut since 1992, according to data compiled by Bloomberg.

Westpac increased provisions for bad and doubtful debts to A$4.14 billion, with A$1.42 billion of that amount for specific loans and the remaining A$3.07 billion in collective provisions.

“Impairments have significantly increased,” Kelly said. “We have also maintained a conservative approach to provisioning and have increased our provisioning coverage.”

Last week, smaller rivals Australia & New Zealand Banking Group Ltd. and National Australia Bank Ltd. posted lower earnings as bad debts jumped. Commonwealth Bank of Australia, the nation’s second-biggest lender, in February said soured loans rose almost fivefold to A$1.6 billion in the six months to Dec. 31.

National Australia Bank, the country’s biggest by assets, on April 28 said first-half profit fell 0.9 percent, while ANZ the next day said profit fell 28 percent in the six months to March 31. Commonwealth Bank’s profit for the six months to Dec. 31 fell 16 percent to A$2 billion excluding a gain of A$547 million from the acquisition of HBOS Plc’s Bankwest unit.

Westpac’s Tier 1 ratio, a measure of the bank’s ability to absorb losses, was 8.4 percent, the company said today. Its cost-to-income ratio fell 440 basis points to 40.4 percent. The net interest margin, the difference between what the bank earns from loans and pays to depositors, increased 24 basis points to 2.24 percent. A basis point is 0.01 percentage point.