Investing.com - Westpac Banking Corp (ASX:WBC) has experienced a significant boost in its six-month net profit, which rose by 22% to $4 billion. This growth is attributed to the bank capitalizing on the widening gap between interest collected on loans and interest paid out for funding.
Like other major retail banks, Westpac has been increasing borrowing costs at a faster rate than deposits, which has positively impacted its profitability metrics. The bank's margins and return-on-equity have both seen substantial improvements, surpassing market expectations.
Despite concerns that profits may have reached their peak among investors analyzing recent bank results, Westpac remains strong. CEO Peter King acknowledged that some mortgage customers are facing challenges due to increased repayments and household expenses; however, he noted that the overall condition of the bank's loan portfolio is robust.
During this reporting period (ending March), there was an aggressive interest rate hike initiated by the Reserve Bank aimed at curbing spending and controlling inflation. Consequently, Australians now face rising borrowing costs along with higher energy and food bills.
Retail banks like Westpac heavily rely on mortgages as their primary source of revenue generation. Historically during periods of rate hikes they manage to capitalize on the expanding difference between interests collected from loans versus those paid out for funding via savings accounts and deposits.
As a result of these practices within retail banking institutions, Australia’s competition regulator has launched an inquiry into retail deposit pricing strategies under government orders.
In terms of performance measures for Westpac during this period – its net interest margin increased by five basis points bringing it up to 1.96%, while its return on equity rose by 205 basis points reaching 11.3%.
Although warnings about potential difficulties faced by customers persist in the banking sector landscape, widespread distress signs have yet to emerge. Westpac did report a slight uptick in borrowers who were 30 days or more behind on their repayments, but the number of 90-day delinquencies decreased.
CEO King expressed that while interest rates are nearing their anticipated peak, the focus now shifts towards monitoring how long they remain elevated and what this means for household budgets and discretionary spending. He anticipates increased financial stress in the coming period, particularly among small businesses.
Some analysts predict that rising mortgage stress will eventually lead to forced property sales by next year. In light of its significant profit growth, Westpac has announced an interim dividend increase of 15% compared to last year, amounting to 70 cents per share.