Marginal Interest

Westpac Banking Corporation posted first-half FY17 cash earnings of $4.017 billion, up 3% on a year ago and in line with Ord Minnett’s expectations, and declared a flat dividend of $0.94 per share, also in line with our forecast and representing an elevated payout ratio of circa 79%.

 

The bank's results echoed the themes highlighted in the results of its rivals, i.e. margins not living up to expectations; an absence of growth in core domestic consumer and business banking franchises; and strong core equity tier-one ratio outcomes around 10%.

 

The 4.0 basis points decline in Westpac's first-half FY17 net interest margin to 2.07% was clearly reflective of the elevated levels of term deposit competition seen towards the end of last year averaging through the book. This was offset by trading gains of circa $700 million being well above the typical $500 million run-rate. We are forecasting a 3.0 basis points improvement in second-half FY17 margins from recent re-pricing initiatives.

 

Regarding the bank levy imposed in the federal budget, the proposed 1 July commencement date of the levy means there will only be a 1.0 basis point drag on net interest margins evident in second-half earnings across the major banks. Accordingly, the banks have time on their side to assess the implications and competitive responses over the coming six months or so.

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