Westpac Reports 6% Increase in Core Earnings

Media Release

3 May, 2007

Westpac Reports 6% Increase in Core Earnings on Back of Strong Mortgage Growth

Westpac New Zealand today announced a steady result for the six months to 31 March 2007, featuring a 6% increase in core earnings compared with the first half of FY2006, and a significant increase in mortgage volumes as greater attention on the Auckland market showed strong gains.

Cash earnings were down 3% in this period, from NZ$227 million to NZ$221 million, due to an increase in impairment losses as tighter monetary conditions exerted stress on some sectors of the New Zealand economy.

Highlights of the year included a 20% increase in mortgage volumes, driven by a focus on the Auckland market. This saw the bank’s share of mortgage registrations in the region grow from 14% in the six months ended 31 March 2006 to 19% for the six months ended 31 March 2007.

Deposit growth was up 11%, and business lending increased by an underlying 15%, maintaining Westpac’s market-leading position.

Volume growth boosted non-interest income by 4%, from $205m to $214m.

Competition for share saw a decline in the overall business margin for New Zealand, down from 2.44% for the six months ended 31 March 2006 to 2.20% in the latest period.

The margin reduction has been the result of the interplay of several factors, many reflecting the intensely competitive nature of the New Zealand market in housing, credit cards, online savings and other product areas. The most significant of these factors were the continuing switch to fixed rate mortgages and the further migration to high interest on-line savings accounts.

Expenses increased by 4% compared with the first half of 2006, reflecting the costs of restructuring, an increase in advertising costs associated with Westpac’s brand re-launch, and higher project amortisation costs.

“While our focus on cost control resulted in expenses meeting plan, further effort will be required to improve our productivity,” Westpac New Zealand chief executive Brad Cooper said.

Impairment losses rose, from a historically very low level of just $11 million in the six months to 31 March 2006 to $42m in the six months ended 31 March 2007.

Brad Cooper said this increase was consistent with the current economic environment. In these circumstances some regrading of our assets is to be expected, but there were no systemic issues.

Stressed exposures as a percentage of total commitments are 1.31%, compared with a five year average of 1.35%.

“New Zealand has enjoyed a long period of relatively benign credit conditions, so small movements upwards from a low base will look ‘lumpy’ in nominal terms.

“The higher impairment losses are in part a reflection the very solid growth in both business and consumer lending Westpac has achieved."

Brad Cooper reiterated that parts of Westpac’s New Zealand business are showing encouraging signs, as the consumer strategies put in place in the second half of last year come on stream.

“But I am not underestimating the challenges for Westpac New Zealand going forward.

“The trade-off between volume and margin will need to be tightly managed, as we expect competition to intensify as New Zealand’s banking sector reacts to slowing economic growth.

“In this context customer satisfaction remains a critical measure for us. We will have to work much harder to lift our overall satisfaction levels, which according to the benchmark AC Neilsen survey remain stubbornly low.

“We need to better understand the reasons for this, and why our industry leadership in several categories of the survey is not yet translating into a much higher overall satisfaction score.

“This is certainly one of my primary areas of focus in the coming months,” Brad Cooper said.

Other, non-financial highlights of the first half of FY07 include: 􀂾 Westpac New Zealand Limited was locally incorporated on 1 November 2006. Importantly, becoming locally incorporated caused no disruption to our 1.4 million customers in New Zealand.

* The launch of Westpac’s Green Home Loan, a first for the New Zealand market and just the latest example of our innovative approach to doing business in an environmentally conscious age.

* The successful roll-out of our Managing Your Money financial literacy programme, with 80% of branch staff trained as facilitators to deliver the workshops into their local communities.

* Westpac has entered into a three-year sponsorship partnership with the Halberg Trust. This includes naming rights to New Zealand’s premiere sporting awards, the Westpac Halberg Awards.

* The breaking of ground on our new corporate headquarters and operations centre at Auckland’s historic Britomart precinct.

Westpac results summary for six months to 31 March, 2007 Note: The numbers included in this release are taken from the ‘New Zealand Business Unit Performance’ section of Westpac Banking Corporation’s interim result for the six months ended 31 March 2007. These figures will differ from those to be published later this month in Westpac New Zealand Limited’s (WNZL) General Disclosure Statement. WNZL has been trading only since 1 November 2006 – when local incorporation took effect - and no comparative data is available.

NZ$m / Half Year Mar 07 / Half Year Sep 06 / Half Year Mar 06 / Mov't Sep 06 Mar 07 / Mov't Mar 06-Mar 07
Net interest income / 494 / 476 / 469 / 4% / 5%
Non-interest income / 214 / 213 / 205 / 0% / 4%
Net Operating income / 708 / 689 / 674 / 3% / 5%
Operating expenses / (341) / (331) / (327) / -3% / -4%
Core earnings / 367 / 358 / 347 / 3% / 6%
Impairment losses / (42) / (20) / (11) / large / large
Operating profit before tax / 325 / 338 / 336 / -4% / -3%
Tax and outside equity interests / (104) / (107) / (109) / 3% / 5%
Net profit after tax/cash earnings / 221 / 231 / 227 / -4% / -3%

Economic profit / 107 / 132 / 126 / -19% / -15%
Expense to income ratio (%) / 48.2% / 48.0% / 48.5% / Up 20bps / Down 30bps

/ $bn / $bn / $bn / /
Deposits / 23.1 / 21.8 / 20.8 / 6% / 11%
Net loans / 40.1 / 36.6 / 34.4 / 10% / 17%
Total assets / 41.4 / 38.7 / 36.1 / 7% / 15%
Funds under management / 1.9 / 1.9 / 1.9 / 0% / 0%

ENDS

© Scoop Media