Westpac's Quarter Profit Is Steady Despite Bad Debts

Westpac, Australia's second-largest bank, held its first-quarter profit steady on Wednesday, overcoming a blow-out in bad debts and underlining the local banking industry's resilience amid global financial crisis.

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Westpac's cash profit fell just two percent to A$1.2 billion ($766 million) for the three months ended Dec. 31, despite bad-debt charges leaping more than five times to $800 million.

Australian banks have weathered the global credit crunch much better than their U.S. and European peers, but analysts wonder how much longer they can weather the effects of a slowing economy and the risk of large companies getting into trouble at home. 

"They are obviously repricing for risk, and they are winning market share as a number of foreign banks and small banks are struggling to stay in the market," said Rohan Walsh, investment manager at Karara Capital.

Westpac said first-quarter revenues rose strongly but did not give a figure. Its results were in marked contrast to the offshore sell-down of banking stocks, which helped drag U.S. stock markets down on Tuesday, and put a floor under Westpac's own share price, which was down 2.8 percent in early trade.

The wider market was off 2.7 percent.

"The underlying business is doing very strongly, but the debate at the moment is how bad will bad debts get? That's the unknown. Ex-bad debts, they are in a very good position," Walsh said.

Westpac did not give any outlook and made no new comments on dividends. Analysts expect Australia's banks to cut dividends this year, a step last taken in the early 1990s, to compensate for rising bad debts.

Westpac's first-quarter impairment charges came close to the A$931 million in charges for the whole of last year. The overall dip in cash profit was on a pro-forma basis, which assumes the earnings of recently acquired St George Bank in the year-ago period.

"There are some bad-debt issues that are affecting all the banks but what we are seeing is that revenue margins are improving for the likes of Westpac and CBA in particular," said Paul Xiradis, chief executive at fund manager Ausbil Dexia.

Earlier this month, top lender National Australia Bank, No. 3 lender Commonwealth Bank of Australia and fourth-largest bank Australia and New Zealand Banking Group all flagged rising bad debts as they face a challenging year of slowing credit growth, rising impairments and limited access to wholesale funding.

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Westpac described its first-quarter performance as robust, with total lending rising 2.4 percent over the fourth quarter, and customer deposits up 9.6 percent.

"With global economic conditions continuing to be volatile, operating conditions will remain difficult. However, Westpac is well positioned to meet the challenges ahead," Westpac chief executive Gail Kelly said in a statement.

Analysts had expected solid earnings from the bank, which took over St George, the fifth-largest local lender, last year in Australia's largest-ever banking deal.

In recent months, banks have been on an equity capital-raising spree to strengthen their balance sheets as provisions rise. Analysts expect them to cut dividends this year, a step last taken in the early 1990s. 

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