Australia’s Westpac Banking Corp (WBC.AX) on Monday dropped a cost-cutting goal, blaming inflation, but after easily exceeding first-half profit projections, investors drove the stock higher.
May 8 – Australia’s Westpac Banking Corp (WBC.AX) on Monday threw out a cost-cutting target citing inflation, but investors pushed its shares higher after it handily beat expectations for first-half profit.
The country’s No. 2 mortgage provider said income for the six months to March leapt 22% from the same period a year earlier to A$4 billion ($2.7 billion) – its best half-year result since 2018 – as sharp increases in interest rates to slow inflation enabled banks to charge borrowers more.
That compares with a consensus estimate of A$3.8 billion published by Visible Alpha.
But inflation was also pushing up overheads, CEO Peter King said, as the 206-year-old bank abandoned a target in place since 2021 to bring annual costs down to A$8 billion by 2024 and which had been subsequently increased to A$8.6 billion.
“We’re going to see services inflation pretty sticky,” King said on a call with analysts and media, noting that the employer of 38,500 people had agreed to a 4% wages increase during the period.
“In terms of costs, they’re not going to reduce,” he added.
The bank said it would instead publish its cost-to-income ratio to illustrate its performance in comparison to competitors.
For the first-half, Westpac reported costs of A$5 billion, down from A$5.2 billion a year earlier. In prior years, the bank’s costs for the first and second half of a year have been similar.
Westpac were up 2% in afternoon trade.
“Overall, the result was likely better than feared,” Jarden analysts said in a client note.
But they noted concerns, including a net interest margin – the difference between interest earned from lending and paid for deposits – that came in “well below” expectations.
“While the market likely did not expect the (cost-cutting) target to be achieved, we think the move away from it does suggest some additional downside for earnings,” they added.
Westpac reported a 5 basis point increase in net interest margin from a year earlier to 1.96% at the end of March – joining rivals ANZ Group Holdings Ltd (ANZ.AX) and National Australia Bank Ltd (NAB.AX) in logging growth.
But Westpac said fierce competition to sell mortgages was likely to narrow margins in the second half for entire banking industry.
The bedrock of Australian retail bank earnings until recently, mortgages are proving so competitive that most large lenders have said they will focus on other business to grow profit.
Westpac plans to redirect resources to institutional banking and to financing the transition from fossil fuels to renewable energy, King said, without giving specifics.
Westpac declared an interim dividend of 70 Australian cents per share, up from 61 Australian cents last year.