Unlike National Australia Bank’s quarterly update last week, Westpac provided no detail on its revenue or cash profit for the quarter. But it said total provisions for impaired loans fell over the quarter, from $4.7 billion to $4.5 billion, which will support profits this half.
“The update shows credit quality remains sound, and we continue to see provision release,” said Azib Khan, banking analyst at E&P Financial Group.
NAB last week reported falling levels of overdue mortgages, with the number more than 90 days late declining by 0.05 percentage points to 0.70 per cent over its third quarter.
At its full-year results last week, Commonwealth Bank said the number of home loans more than 90 days overdue fell to just 0.49 per cent of all loans, down from 0.64 per cent a year ago.
With limited information provided by Westpac, analysts will focus on the impact of bank capital from the rising rate cycle. Banks apply “risk weightings” under global rules to their loans that reflect risk, and determine how much capital needs to be carried as buffers. That capital is invested; banks can make returns on this, but need to account for potential losses embedded in their investment strategies.
Westpac said in the rising interest rate environment, the ‘interest rate risk in the banking book’ had increased by almost $16 billion, due to an ‘embedded loss’ that flows through from rate rises when its capital is invested over three years. This was the major component of a 3.9 per cent rise in total risk-weighted assets over the quarter to $478 billion, reducing CET1.
It’s a technical area other banks have also pointed to. For example, Commonwealth Bank last week also reported higher interest rate in the banking book, or IRRBB, which had increased by $33 billion, requiring an additional $4 billion of capital.
CBA said the IRRBB drag was higher due to more swap rate risk and embedded losses, as it absorbed changing valuations for its capital invested over three years to reduce volatility of earnings during the cycle.
Westpac said its funding and liquidity remained strong: the liquidity coverage ratio is 130 per cent and the net stable funding ratio is 123 per cent.
It also said that it was modelling its expected losses using forecasts of GDP growth halving to 2 per cent by June next year, unemployment remaining low at 3.5 per cent by June next year, and residential property prices falling by 7.8 per cent over the next 12 months.
Read More: Westpac debt update shows credit quality remains pristine