Banking giant Westpac has raised its buffers for soured loans as it prepares for a weakening in the economy due to the Middle East war, even as its latest results showed fewer borrowers were struggling with repayments.
The country’s second-largest mortgage lender said on Tuesday that it was increasing its provisions for bad debts, a sign the bank is preparing for a softer economy and disruption from the energy crisis, as it notched up $3.4 billion in first-half profits.
The results included about $200 million in extra provisions for bad debts compared with the previous half, as the lender sought to protect its balance sheet from potential losses caused by pain inflicted on energy-intensive sectors.
As the Reserve Bank on Tuesday jacked up interest rates again, Westpac reaffirmed it expects more pain for borrowers, tipping two more rate increases, which would take the cash rate to 4.85 per cent.
Chief executive Anthony Miller said he thought the economy would avoid a recession, and his bigger concern was that business investment decisions would be put on hold because of uncertainty.
“At the moment we don’t forecast a recession, but people who talk with absolute certainty today in this environment, I think, are misinformed because it’s an unusual environment in which we’re in, and there’s no doubt that there’s a lot of competing forces here,” he said.
Miller said that while higher interest rates were slowing the economy down, price rises caused by the energy crisis could also dampen spending, which could mean fewer rate rises were needed.
“I do think the uncertainty is the bigger issue here because the thing that I’m more worried about … is that businesses and investment decisions are put on hold,” he said.
Miller said that although the latest results showed the number of customers in financial distress had declined, the bank was being prudent in raising its provisions.
Westpac said its deposits and loans grew more than 7 per cent over the year, with its total loans rising to $890.3 billion as customer deposits hit $745.2 billion. Stressed loans fell 12 basis points from the September half, to 1.16 per cent of total exposures.
As well as forecasting higher interest rates, the bank is tipping an increase in unemployment to 5 per cent by early next year, compared with 4.3 per cent currently.
It is also tipping a slowdown in the property market. Westpac’s economists are forecasting 1 per cent growth in house prices in Sydney and Melbourne this year, and 3 per cent across capital cities on average.
Miller noted the slowdown in auction clearance rates, and said people’s expectations of prices had also fallen, but added this was partly what the RBA would want to achieve by raising interest rates. He said the full impacts of the energy crisis and the rate increases were yet to flow through to borrowers.
“It’s early days in many respects because the second interest rate rise that occurred in the first week of March is only now being implemented and landing in terms of increased rates for borrowers,” Miller said. “So there’s still quite a lot to play out for the consumer at the moment.”
The bank declared an interim dividend of 77¢ a share, the same as for the September half.
National Australia Bank and ANZ Bank have also recently topped up their provisions for bad debts and cautioned about the economic risks of the energy shock, though bankers say the crisis has not yet caused notable changes in customers’ behaviour or their financial health.
On Monday, NAB, the country’s biggest lender to small business, said it expected Australia would avoid recession, but some industries were facing particular pressure from the energy crunch, including transport and logistics firms.
NAB chief Andrew Irvine said it was still too early to know the economic fallout from the war, while underlining concerns that household and business customers had raised about soaring fuel costs, disruptions to supply, higher inflation and rising interest rates.
“While conditions continue to be good, confidence has really kind of plummeted, and that’s a worry,” Irvine said as NAB reported half-year cash profits of $2.6 billion.
“Our best forecast is that we will see a reduction in business activity over the second half of the year and to the extent there are customers that are doing it tough, we’ll be there for them.”
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Clancy Yeates is deputy business editor. He has covered banking and financial services, and was previously national business correspondent in the Canberra bureau.Connect via X or email.