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Eric Johnston
May 7, 2009

WESTPAC’S chief executive, Gail Kelly, has warned that the economy will deteriorate further into next year and recovery from recession is likely to be a “slow haul”.

But she believed households were holding up better than previously feared and low interest rates would help the housing sector to lead the recovery.

Yesterday Westpac became the latest of the major banks to cut its dividend as it sought to conserve cash and protect its balance sheet from the rising tide of bad debts.

The country’s largest bank by sharemarket capitalisation reported a 6 per cent decline in first half cash earnings to $2.29 billion.

The result, which includes the first full six-month earnings contribution from St George, was in line with expectations and underscored the impact the economic downturn is having on the sector.

In the past week NAB handed down a 9.4 per cent drop in first half earnings, while ANZ’s interim profit slumped 43 per cent.

Westpac’s result took the total cash profits earned by the big four banks to $7 billion since Commonwealth Bank kicked off the latest reporting season in February. They remain on target to turn in combined full year earnings of $15 billion for 2009.

Westpac’s interim dividend payout will be cut 20 per cent to 56c a share.

Analysts described the result as higher quality than the other bank profits handed down in the past fortnight. “We would regard this as the strongest result this bank reporting season,” said Credit Suisse’s James Ellis.

Westpac remains vulnerable to rising losses across its substantial exposure to commercial property, which accounts for nearly 10 per cent of its loans book.

Ms Kelly was more cautious about the prospect of a rapid recovery. She said lending losses were starting to spread from corporates to small- to mid-sized businesses and consumers.

“When the recovery comes, it is likely to be a slow,” she said.

After a slow start to the first half, St George delivered a 6 per cent increase in cash earnings to $529 million for the first half. Earnings across Westpac’s flagship retail business jumped 17 per cent, while earnings from its institutional operations slumped 62 per cent.

Westpac’s net interest margin expanded to 2.24 per cent from 2 per cent in the previous half, but it included an increase of about 10 basis points associated with trading and treasury operations.

Bad debt charges of $1.61 billion were more than three times the $541 million in the first half a year ago.

The latest provisions include $700 million from the collapsed corporate “bad boys” such as Allco Finance, ABC Learning and Babcock & Brown.

The bank also had a bigger than expected jump in losses across its margin lending book, which was hit with $156 million in losses across just three large trading accounts.

Westpac’s total provisioning now stands at $4.5 billion and the bank is among the best prepared to take shocks to its balance sheet.

The shares rose 46c to $19.96 yesterday.


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