Westpac Banking Corporation (WBC) Earnings Call Transcript

Good morning, and welcome to Westpac's Third Quarter FY '26 update. I'm Justin McCarthy, General Manager of Investor Relations. Joining me today is Nathan Goonan, our CFO. Before we commence, I acknowledge the traditional custodians of the land in which we meet. For us in Barangaroo, that's the Gadigal people of the Eora Nation. I pay my respects to elders past and present, and extend that respect to all Aboriginal and Torres Strait Islander people. Nathan will provide a brief overview of our quarterly performance and then take questions. In the interest of time, we'll take one question per person. Nathan?

Thanks, Justin, and good morning, everyone. The third quarter reflected continued operational and balance sheet momentum, underpinned by disciplined execution of our strategy. While the external environment remains uncertain, we are well positioned with a strong balance sheet, disciplined risk settings and a clear strategic agenda. That agenda is centered on improving service and deepening customer relationships, with an emphasis on the proprietary channel in both consumer and business. We are focused on simplifying our business and increasing productivity. UNITE is progressing well, and we are implementing a revised operating model catalyst to further improve our execution. Net profit, excluding notable items, increased 2% compared to the first half '26 average. Revenue was up 1%, with growth of between 2% and 4% in our Australian divisions. This was partially offset by a 7% decline in New Zealand or 3% in constant currency terms. Net interest income increased 2%, which more than offset a 3% decline in noninterest income due to timing and one-off items. Volatile items related to geopolitical uncertainty and the associated increase in market volatility were only a slight drag, following a $271 million reduction in the first half. Operating expenses were up 1%. These revenue and expense outcomes resulted in pre-provision profit growth of 1%. Sustainably growing customer deposits underpins our ambition to improve returns. The growth of 2% in the quarter highlights this priority. Consistent with seasonal patterns, transaction balances grew strongly. Business and wealth and institutional increased by 4% and 10%, respectively, while household transaction balances were stable. The notable mix shift in the deposit portfolio was a slowing in consumer saving balances and an increase in term deposits, with advertised term deposit rates above the saving rates for the first time since December 2023. We expect system deposit growth to remain solid during the fourth quarter, supported by a seasonal increase in household balances and a likely reduction in institutional deposits. Loans increased 2%, with growth across all customer segments. Australian mortgages, excluding RAMS, grew by 2%, slightly above system. The proportion of proprietary flow rose to 36%, reflecting progress in executing our mortgage strategy. We expect mortgage system growth to moderate in the fourth quarter in response to a higher rate environment and the recent federal government policy changes. In the near term, our growth is likely to be below system, given our initial cautious response to heightened competition. Compared with the second quarter, mortgage applications declined 11% in the third quarter and have declined 20% since the budget. Based on our analysis of credit checks, system-wide applications have fallen by slightly less than these amounts. These trends remain broadly consistent with our economics team housing credit growth forecast of 6.8% in FY '26 and 4.7% in FY '27. Institutional lending and Australian business lending grew by 3% and 4%, respectively, as we continue to increase market share. The RAMS transaction settled on the 1st of August, resulting in a $15.4 billion reduction in mortgages. Net interest margin was stable at 1.89%. Core NIM of 1.78% was flat compared with the first half '26, although it was up 1 basis point in the quarter. As foreshadowed, the nonrepeat of timing differences following the RBA rate changes in the first half added 1 basis point. Lending margins were lower, the rate of compression moderated in institutional and business lending, while mortgage margin compression in Australia and New Zealand was more pronounced. The contraction in Australia reflected a modest increase in both new fixed rate lending and switching and the runoff in higher-margin accounts, while competition intensified in New Zealand as fixed rate lending increased. Deposit margins improved, reflecting benefits from the replicating portfolio and the higher interest rates on unhedged deposits. More customers qualifying for the bonus rate and a mix shift to higher-yielding products partially offset these benefits. Liquid assets provided a modest benefit, reflecting favorable mix, as liquid assets rose by less than average lending assets. The impact was slightly lower than previously expected, reflecting stronger-than-anticipated institutional deposit growth. The treasury and markets contribution of 11 basis points was stable. For the second half, we continue to expect a replicating portfolio tailwind of 2 basis points. While immaterial to revenue, the impact of liquids is now expected to be neutral or a slight drag, reflecting ongoing deposit growth. Lending margins are likely to contract given heightened mortgage competition in both Australia and New Zealand, and the benefit of higher rates on deposit margins is expected to be offset by a combination of both rate and mix impacts, including higher qualifying on savings balances. Expenses were well managed, with the 1% increase reflecting the averaging impact from higher salary and wages and our continued investment in our business. We remain on track for structural productivity savings of more than $550 million in FY '26. Total investment spend is expected to be approximately $2 billion. Within that, there has been a slight acceleration in UNITE, which is now expected to be modestly above the top end of the previously guided range of $850 million to $900 million. We now expect amortization to decline in the second half, reflecting timing of the completion of non-UNITE projects. Consistent with trends we outlined at the first half, businesses continue to show resilience. And while consumer spend has slowed marginally, it remains at reasonable rate of growth by historical standards. Credit quality metrics remain sound. Stressed exposures to total committed exposures increased 3 basis points. This reflects a modest increase in watch list and substandard exposures in property, utility and manufacturing sectors. Our non-retail portfolio continues to be well diversified across sectors and geographies. Households have been resilient in the face of higher interest rates and cost of living pressures. Mortgage delinquencies edged up 1 basis point to 58 basis points and hardship balances rose 5 basis points. Credit impairment charges were stable at 10 basis points of average gross loans. Total credit provisions rose marginally and at $5.3 billion and now $2 billion above our base case. Collectively assessed provisions to credit risk-weighted assets decreased 2 basis points to 1.27%, while total provisions to gross loans were stable at 58 points. Modeled collective assessed provisions were slightly higher. Revised economic forecast provided a modest release. This was more than offset by management judgments, including updates to the downside severity methodology and increases in overlays. The CET1 capital ratio remained strong at 12.1%. The reduction in CET1 reflects a payment of the half year '26 dividend and an increase in risk-weighted assets, more than offsetting earnings for the quarter. Various movements in risk-weighted assets are outlined in the materials. We received a 23 basis point benefit from the completion of the RAMS portfolio sale on 1 August. To conclude, the performance for this quarter demonstrates solid progress against our plans in a competitive environment. Disciplined execution is driving our momentum. We're striving to be more efficient while investing in our business. And with that, I'll hand back to Justin for questions.

Thanks, Nathan. And just to restate, we've got a dozen of you in the queue. So if you could limit your questions to one, that would be helpful for us to get through. Our first question comes from Richard Wiles from Morgan Stanley. Richard?

You mentioned that your mortgage application run rate post budget was 26,000. That's down about 20% on the March quarter and maybe 25% on the December quarter. Nathan, can you tell us how far investor applications have fallen since the budget?

Yes. Thanks, Richard. It's a good question actually because I think it's worth just reflecting on the number of factors that are creating some uncertainty in that market and in particular, around rates and budget changes. So owner-occupiers down 18% and invested down 26%, which I guess we probably draw some conclusion from that, that the rate impact is probably equal or potentially a bigger impact than anything that happened in the budget.

And that 18% and 26%, what number are you comparing it with, Nathan? Is that...

Comparing it to the 20% since the budget, Richard, yes, on a like-for-like basis, yes. One other way to look at it, Richard, is just to say, if you did look at the period from the budget to now and you picked up the 5-year average of our applications, we're down about 11% from that 5-year average.

That's total mortgages?

Yes.

Our next question comes from Matthew Wilson from Jarden. Matthew.

Matt Wilson, Jarden. Just following on Richard's question on Slide 2, you say average monthly mortgage volumes. What are actual monthly mortgage volumes doing? Because that would imply that the endpoint is much worse than the start point. It's a nuance, but could you articulate that?

Yes. Thanks, Matt. We probably have had a little bit more in June where it's been a bit more compressed. But I would say, I think sometimes the seasonality month-to-month is quite predictable, and you can have in June, a fair bit of tax structuring and different things that happen around that. So I would be cautious about -- the reason we've done the quarterlies is we think that's a more reflective trend. And I would say, overall, Matt, on this housing point, our fundamental point today will be to say, I think we do need to let this play out a little bit. The trends that we're seeing, we still believe are very consistent with the economics forecast of 4.7% growth in '27, 6.8% in FY '26. So we'd be cautious about drawing too many conclusions on 1 month of data, but you'd be right to say June was lower than the prior 2 months.

And July would follow, I imagine.

Yes. There's a little bit of -- you're getting into the real micro now, Matt, but I did see in our weeklies that applications were up last week relative to where they've been. So let's see how it plays out. We're looking forward to being on our feet in November and have a bigger sample set to be able to really talk through it. And one thing, as I said to -- in Richard's comments, I think we do know that rate volatility is the biggest determining factor of uncertainty in the mortgage market. And we've gone from a period, even if you just took our economic forecast where we're expecting 2 rate rises and now we're potentially suggesting the next rate move is down, and that type of uncertainty does particularly put the mortgage market into a bit of a suspended animation.

Thanks, Matt. Our next question comes from Andrew Lyons from Jefferies. Andrew?

Nathan, you've highlighted good momentum in the franchise with both loans and deposits growing by 7% on the PCP. However, when we look at our quarterly revenues on a PCP basis, they're actually down slightly. Now I recognize there can be a lot of noise in these quarterly results. But can you perhaps just talk to this trend? And obviously, with the replicating portfolio easing from a tailwind perspective, just the extent to which we could see this sort of revenue -- year-over-year revenue trend improve going forward?

Yes. Thanks, Andrew. And I think in the preprepared, I did call out -- and I think I'm very conscious about sort of explaining things a way where we say like this is good and this is good and then it gets offset by that. But I do think, if you look at some of the underlying revenue in the quarter, revenue was up 4% in our institutional business, NII in our institutional business up 6%. In business and wealth, we had revenue in the quarter up 3%. And in our consumer bank, NII up 3% and revenue up 2%. So we have -- we do feel like we've got that underlying revenue growth in the franchise, Andrew. Unfortunately, we had a 3% decline in sort of noninterest income that I can talk to. Treasury has stabilized in the quarter, but was still down on the first half average. And then obviously, New Zealand has been -- had a little bit of a challenging period. So I guess I don't want to get into the games of like if you look over here, it's all good. And if you exclude these things, it's all good. But I do think, underlying, we've got that momentum in the franchise. And I think that is giving us the opportunity to get that earnings growth over time. And I think underlying, we're seeing it, which gives us some confidence in that.

Thank you, Andrew. Our next question comes from Jonathan Mott from Barrenjoey. Jonathan?

If I could just ask a question on the margin. And specifically, you called out competition and the change in the savings -- percentage of people getting the bonus rate. If we actually look in the last couple of weeks, it appears that competition is intensifying. CBA started cutting their mortgage rates. Everyone else has had to follow. And then we're seeing some savings rates. So ING, I think, is now offering up to 6%. So would you be expecting into this next sort of 3 to 6 months, the impact of competition to be intensifying? And also that bonus rate comment, what percentage of customers are now qualifying for the bonus rate?

Yes. Thanks, John. Maybe I'll just answer the point question at the end first. I'd say we've had about a percentage point uptick in the quarter on the qualifying on the bonus rate. So we'd be sort of now at the 86. I think there is some sort of upward pressure on that, John. It's -- one of the things that we're deliberately doing is just trying to stimulate a little bit more in that regard. We did have, as I said in my preprepared, an interesting quarter in consumer deposits, where probably for the first time in a number of periods, we had our savings product sort of stable, marginally down, a little bit of that seasonality, but we did have some growth in TDs, which is probably the first time we've had term deposits in our consumer book growing by more than our savings product certainly since about 2023. So margins are still better on those savings products, and we're making some changes there just to stimulate a little bit more qualification, which we think overall, will give a better margin outcome than the TDs. Your broader point on -- and sorry, I should just say that will probably lead to even a little bit more increase in that qualification rate. Your broader point on competition, I think, is well noted. The impact of that increased mortgage competition is not necessarily evident in our third quarter margin outcomes. But I do think the -- we're probably expecting now that we're growing at a subsystem level as we were a little bit cautious when that competition came in. We're probably back participating a little bit more in that, but I'd still expect us to be subsystem, and I'd still expect us to be talking about mortgage competition as being a more pronounced part of our margin outcomes in the -- when we get to the full year results.

Our next question comes from Ed Henning from CLSA. Ed?

All right. Can I just have one on expenses? Can you just talk about any seasonality running into the fourth quarter? You talked about the amortization decline coming through. So does that see the expense growth soften in the fourth quarter just given the amort declines? Or how should we think about that?

Yes. Thanks, Ed. No, you should expect that we'll still have some seasonal uptick of expenses in the fourth quarter. I think -- as you know, Ed, I do prefer to look at expenses on an annual basis. And then even in -- within -- when we're talking about the halves, I think we have a lot of seasonality. So when you're talking about the quarters, it's particularly pointed that you can get some seasonality. I would say there's probably nothing different -- materially different in the quarter relative to our positioning that we would have given you at the half, except for the mix shift in investment spend. So a bit more of a tilt towards UNITE that's had -- will now be slightly above that top end of the range we've previously given. And then given UNITE has squeezed out a bit of other spend, some of the programs that would have started amortizing or we expect it to start amortizing won't kick in yet. So amortization likely to be a bit of a tailwind. If I step back from the quarter, I think we've had another good quarter on expenses. And I think -- if you think about the annual plans that we set ourselves, I think we continue to track a little bit better than where we expected. We're very focused on productivity. And so we think that we're doing a good job on the $550 million. And it's clearly just such a critical focus for us alongside UNITE to make this organization more efficient. All that said, I think we are executing well, but we would expect fourth quarter will be seasonally higher than where we've been.

Thanks, Ed. Our next question comes from Brian Johnson from MST. Brian?