Westpac CEO Peter King has said interest rates will need to rise further off the back of a substantial lift in his bank’s annual profits.
“It’s looking like interest rates need to go a bit higher because the economy is stronger than what we think,” he said in a media release (pdf).
“We are not yet seeing significant increases in customers falling behind on repayments.”
This judgement is based on what Mr. King believes to be a “modest increase” in stress amongst consumers, with around 13,000 Westpac customers entered into financial hardship arrangements, a small figure in the eyes of the bank’s leadership.
“But this doesn’t mean it’s been an easy road. From experience we know customers prioritise paying their mortgage while cutting back their spending elsewhere,” he said.
“We remain focused on helping those who need it and encourage customers to call us early.”
In fact, the number of bank customers experiencing financial difficulty spiked 10 percent in FY23, equivalent to an extra 69,000 in need of assistance (pdf). The number of customer calls to the bank increased by 2,100 throughout the year.
But Mr. King notes that hardship levels remain at around half the levels seen during COVID.
He also spoke highly of his bank’s improvement in financial performance amid turbulent conditions for consumers.
“We’ve further strengthened the bank, improved our financial performance and continued to support customers in a rising interest rate environment,” he said.
“This result delivers a better return on equity, higher earnings per share and increased net profit. This is built on the back of growth in key markets including deposits, mortgages and institutional banking. A strong banking sector is vital for a resilient economy.”
Westpac has reported net profits of $7.2 billion for FY23, a 26 percent jump from last year as a result of steep increases in interest rates over the past 18 months. The bank has also delivered a considerable increase in dividends paid to shareholders of 28 percent on FY22.
The bank’s leadership has announced it will use these profits to conduct a $1.5 billion share buyback, a corporate strategy typically used to enhance shareholder value and desirability for investment. The less shares an entity has on offer, the greater the marginal value of each individual share.
Banking Profits
Australia’s major commercial banks have experienced record profits since the Reserve Bank of Australia (RBA) began to increase the cash rate from its prolonged low of 0.1 percent in May 2022.According to a report from PricewaterhouseCoopers (PwC) published a year on from the beginning of rate hikes last year, the nation’s major banks delivered record cash earnings of $17.1 billion in the first half of 2023 and are currently on track to continue the trend at the end of the year.
The banking sector has used cash rate hikes to lift margins through increasing rates for borrowing at a faster pace than it has for deposits. So when customers go to their bank, they are charged more when taking out a loan than what they are charged for a deposit.
The net interest margin (NIM) represents the difference between the interest income a financial institution earns on its assets (mainly loans) and the interest expenses it incurs on its liabilities (deposits and borrowings).
According to the PwC report, the NIM increased by 14 basis points in the first half of this year.
The other way in which banks have been able to boost profitability is through the engineered disparity between the proportions in which they pass on cash rate cuts compared to hikes for extended credit.
Conversely, they have not been passing on interest rate increases in proportion with cuts to depositors.
In June 2019, the RBA decreased the cash rate from 1.5 to 1.25 percent. This was followed by five additional cuts before reaching a low of 0.1 percent in December 2020 at the onset of COVID-19. In March 2020, there were two rate cuts.
The Australian and New Zealand Banking Corporation (ANZ) was the only major Australian commercial bank to cut its variable home loan rate in conjunction with the RBA, although a full cut was not passed on.
The Australian Competition and Consumer Commission (ACCC) has since facilitated a probe into how banks set interest rates for consumers under direction from the Albanese Government.
In its inquiry, the ACCC is currently investigating differences in rate increases between deposits and home loans set by commercial banks.
“We welcome this direction from the Government to shine a light on the retail deposit market and rate-setting decisions of banks,” ACCC Chair Gina Cass-Gotlieb said in a media release in February.
“We are aware that deposit and savings accounts are an important source of income for many Australians, typically supplementing their income from employment, superannuation and the pension.”
Ms. Cass-Gotlieb also outlined the body’s commitment to investigating competition within the sector.
“We will also examine the extent to which consumers can benefit from shopping around and switching, and what other barriers are stopping consumers from seeking a better return on their savings.”
The ACCC’s findings will be released in early December.
