Westpac chief financial officer Michael Rowland said higher loan balances, reduced costs and a strong contribution from treasury and markets during the December quarter had contributed to “a solid start to the year”.
As the bank released a first quarter update, Mr Rowland said Westpac's cash earnings of $1.58 billion increased 74 per cent from the average in the second half of 2021. When excluding notable items, the increase was 1 per cent.
“Our loan balances grew $5 billion, which was pleasing,” he told Westpac Wire.
“We also reduced costs by 7 per cent, which is a great outcome… of the simplification work that all our businesses are starting to undertake.”
To continue the work to simplify the business as part of its ‘fix, simplify, perform’ agenda, Westpac also unveiled changes to the bank’s operating structure, which Mr Rowland expected would further improve efficiencies as the bank targets a cost base of $8bn by 2024, as outlined in the 2021 half year results.
“As part of that cost target, we indicated that we would create a smaller head office to reflect the simplified organisation that we're creating, where we're exiting a number of non-core businesses, (and) simplifying our business through automation and digitisation,” Mr Rowland said.
The structural changes will create a "lean” head office, according to a separate released by the bank today, eventually reducing the size of corporate functions by around 20 per cent. As part of the announcement, chief executive Peter King also signalled changes to his executive team, including the departures of chief risk officer David Stephen and group executive, financial crime, compliance and conduct Les Vance, along with the appointment of incoming chief risk officer Ryan Zanin, who joins from New York’s Federal National Mortgage Association (Fannie Mae).
Mr Rowland said competitive pressures in mortgage and business lending markets contributed to an 8 basis point drop in Westpac’s net interest margin during the December quarter, to 1.91 percent.
“The last 12 to 18 months has been the most significant competition on rates in the mortgage and small business market that I've ever seen,” he said.
“I expect that level of competition to continue, so our challenge is how we respond to that.”
Despite ongoing difficulties for customers caused by the latest wave of COVID-19, Mr Rowland said it hadn’t translated to new stress in the portfolio during the December quarter, and the asset quality of the underlying portfolio had continued to improve.
However, given the continuing uncertainties, such as supply chain disruptions and reduced activity in some sectors, he said the bank had taken a “prudent” decision to increase provisions by $551m, contributing to an overall impairment charge of $118m for the first quarter.
“While … a lot of our customers in specific industries have found it very difficult, particularly those that are in hospitality… our customers have been surprisingly ... robust as we came into the Omicron wave towards the end of last year.”
Although uncertainty remained around the impact of COVID, Mr Rowland said he felt “reasonably positive” about Australia’s economic outlook.
“Westpac’s economists are forecasting more than 6 per cent GDP growth this year,” he said.
“The expectation now is that unemployment will dip below 4 per cent, and that'll be the first time in a lot of people's living memory.
“So, the fundamental settings for the economy are strong, and that augurs well for our business.”