Westpac reduces ROE targets
(9 November 2016 – Australia) In its latest earnings report, Westpac Banking Corp (WBC) dropped its return on equity (ROE) target of 15 percent, saying it is "no longer realistic" given the environment of low interest rates and tighter regulation.
Reporting a A$7.8 billion full-year cash profit, the bank’s chief executive Brian Hartzer said it is now targeting return on equity over the medium term between 13 percent to 14 percent.
Westpac's ROE was down 1.85 percentage points to 14 percent for the full year, as regulatory pressure forced the big four to increase capital in 2015.
Westpac's full-year result was driven by increased lending in the retail and business bank, which was offset by more challenging conditions in institutional banking and funds management.
"Given the current operating environment, including the expectation that low interest rates will continue for some time, the evolving regulations for capital and liquidity, and higher regulatory and compliance costs, the current 15 per cent ROE target for the group as a whole is no longer realistic," Hartzer said.
"Westpac believes in maintaining strong return disciplines and will be seeking to achieve a ROE in the range of 13 per cent to 14 per cent in the medium term."
The bank’s business lending grew by three percent, while domestic mortgages increased by eight percent, pushing net interest income up eight percent to A$15.3 billion.
Hartzer said Westpac had increased loans to Australian individuals and businesses last year by A$33 billion.
However, the bank’s intuitional business "continues to face both structural and cyclical pressures", the bank said with cash earnings down 18 percent, while cash earnings were down four percent at BT Financial Group.
On credit quality, Westpac said conditions were sound but that stressed assets were increasing albeit off a low base.
The second half impairment charge of A$457 million was 31 percent lower compared to the first half of 2016, but the level of stressed assets rose "modestly" over the year, the bank said, by 21 basis points to 1.20 percent at 30 September.
Although the country’s GDP is expected to increase by around three percent next year, growth in Western Australia and Queensland will continue to be below trend, while "the international outlook has softened over the year, with growth in China continuing to slow and uncertain economic conditions in Europe," Hartzer said.
“With top-quartile capital, healthy liquidity, and sector-leading asset quality, we remain in a strong position to respond to the volatile global environment. As we approach the group's 200th anniversary in April of 2017, we are well placed to continue to deliver solid returns for our shareholders," Hartzer added.
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