Australia’s Westpac flags second-half margin pressure, drops cost target

A pedestrian looks at his phone as he walks past a logo for Australia's Westpac Banking Corp located outside a branch in central SydneyA pedestrian looks at his phone as he walks past a logo for Australia's Westpac Banking Corp located outside a branch in central Sydney, Australia, November 5, 2018. REUTERS/David Gray

May 8 (Reuters) – Australia's Westpac Banking Corp (WBC.AX) on Monday warned of "intense" mortgage competition pressuring its margins in the current half, and said it was dropping a cost target to instead focus on relative peer performance because of high inflation.

Westpac, which previously benefited from a bold cost-cutting strategy, disclosed plans to move away from an absolute expense target and to focus more on improving its expense-to-income ratio in comparison to its peers.

"We're making this change due to expected continuing inflation pressure, ongoing and new risk and regulatory requirements and our focus on growth," Westpac CEO Peter King said in a statement.

Westpac, the country's No. 3 bank, also said credit growth in housing and business lending was starting to ease after reporting a 22% jump in net profit to A$4 billion ($2.70 billion) for the six months ended March 31.

Australian lenders have relied heavily on mortgages and retail deposits, but that is now threatening to hurt profitability as competition intensifies and weakens margins.

Rival ANZ Banking Group Ltd (ANZ.AX), which reported a 23% jump in cash profit on Friday, signalled its plans to diversify from mortgages as the windfall from high interest rates peaks.

Westpac said it had reduced its cost base further, bringing its expense-to-income ratio down to 45.9% in the first half, from 52.8% a year earlier.

The company had earlier revised its cost target to A$8.6 billion by fiscal 2024, compared to a prior goal of A$8 billion.

Net interest margin – the difference between interest earned from lending and paid for deposits – rose 5 basis points from a year earlier to 1.96% at the end of March.

Westpac declared an interim dividend of 70 Australian cents per share, up from 61 Australian cents last year.

($1 = 1.4810 Australian dollars)

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