Westpac says bad debts will increase

Weaker economic conditions have started to show up in the banks' impairment provisions and bad debt charges and are no longer confined to a few prominent credits that first hit the rocks 10 months ago.

Presenting Westpac's profit for 2008 chief executive Gail Kelly said yesterday that impairments in the March half reflected a small number of large exposures, most of them in the institutional banking division. But impairments in the second half were spread broadly across the business portfolio and, to a lesser extent, the consumer lending portfolio.

Kelly said she expected the bank's bad debt experience, which is now back to the level of the 2001 slowdown, to worsen in the coming year.

An impairment charge of $931 million, up 93 per cent on the previous year, took the shine off an otherwise solid result for Westpac.

The bank reported a net profit of $3.8 billion for the year to September, an increase of 11.8 per cent over the previous year. After adjusting for significant items, cash earnings of $3.7 billion were up six per cent on the previous year.

The impairment charge was made up of $447 million of individually assessed provisions, including $160 million of loans in Westpac Institutional Bank, $92 million of loans in the Business Financial Services division, and $51 million of New Zealand loans.

Collective provisions of $606 million included $76 million of write-offs in the card portfolio, stressed exposures in BFS, NZ and WIB, and a $76 million provision for the financial crisis.

There were $122 million of write-backs and recoveries.

Impairment charges as a percentage of average gross loans rose from 19 to 31 basis points, taking the level back to where it was in 2001 and 2002.

Westpac chief financial officer Phil Coffey said that if the old accounting standards were still in force the level of impairment would be at a decade high.

Non-performing loans increased from $540 million in 2007 to $1.17 billion ($535 million of which is provided for). According to Westpac's disclosures its impaired provisions to gross impaired assets, at 45.4 per cent, was second to Commonwealth Bank, at 54 per cent.

The level of impaired provisions to gross impaired assets for ANZ is 25.3 per cent and for National Australia Bank 30 per cent.

Housing loans 90 days past due rose from $139 to $219 million and make up 0.39 per cent of the mortgage book.

Kelly said the bank had done a very thorough review of its loan portfolio and had been vigilant about putting loans on its watchlist. Stressed exposures, which include impaired assets, loans 90 days past due, loans on watchlist and substandard loans, made up 1.3 per cent of total committed exposures at September, an increase of 42 basis points over the previous year.

The value of assets on watchlist went from $80 million in the first half to $1.3 billion in the second half. Kelly put this down to "proactive identification of potential problems".

Watchlist increases have been in the institutional bank, business banking in Australia and New Zealand and the New Zealand home lending market.

Half of the increase in stressed exposures over the past year has come from the business financial services division.

In business banking stressed exposures make up three per cent of total committed exposures. Property loans make up the biggest chunk of the stressed exposure, accounting for 29 per cent of the total.

Manufacturing accounts for 12 per cent, wholesale trade 10 per cent, retail trade eight per cent, agriculture, forestry and fishing seven per cent, and finance and insurance five per cent.

Kelly said the good news about the deterioration in the business portfolio was that it was widely spread. The bank would be paying close attention to any threat of concentration risk, particularly in commercial property, as the Westpac and St George business portfolios come together next year.

Commercial property is one of the big areas of sensitivity in a deteriorating credit environment. Westpac has $41 billion, or eight per cent of its total exposures, committed to property.

The bank's view is that the portfolio is well diversified.

Fifty per cent of property loans are for amounts below $10 million. Loans of more than $10 million to developers make up 13 per cent of the portfolio, loans of more than $10 million to investors make up 17 per cent of the portfolio and loans of more than $10 million to property trusts make up 20 per cent of the portfolio.

Lending to financial institutions, another hot spot, is also $41 billion. Borrowers include investment banks, investment companies and non-bank financial institutions.

Stressed exposures in that sector are 93 basis points of financial institution exposures.

The bank has taken on an increased exposure to corporates over the past year, as alternative funding for corporates in capital markets has dried up. Lending to corporates is now 35 per cent of total exposures, compared to 29 per cent two years ago.

While the exposure to corporates has increased, the bank has reduced its top 10 corporate and financial institutions exposures, as a percentage of total exposures, from 2.5 per cent earlier in the decade to two per cent now.