Covid-19 will be tough on banks, Westpac warns as it reports steep profit drop

Monday, 4 May 2020

Westpac's has reported a 50 per cent profit drop in the first half of this year, compared to last.

It made $256 million in the six months, compared to $509m in the six months to March 2019.

Chief executive David McLean said the pandemic's effect would be seen in banks' financial performance. There was little good news in the result, he said,

'Our entire outlook changed in the space of a couple of weeks as the country went into lockdown. This half-year result reflects only the early impacts of Covid-19, and our initial assessment of the lending losses we’re likely to see as a result.

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He said it was 'impossible to say' how bad the Covid-19 outbreak would be because there was no example from history to provide any guidance.

The downturn was much shaper than in other crises, he said, and unemployment was expected to increase much more quickly.

But because it was caused by an external shock of the virus, the recovery could come quite quickly when that threat was removed.

He said the Government in New Zealand, and others around the world, seemed committed to doing whatever was necessary to lessen the impact of the blow.

The response from governments had been faster and bigger than in previous downturns, he said. 

He said New Zealand was well-positioned for recovery, having entered the crisis in a sound economic position and having responded to the pandemic well. How long it would take would depend on a lot of factors, such as how long it took exporters to recover and whether local travel could help offset the tourism blow. 

“Interest rates remain at all-time lows, which will help soften the impact on borrowers whose incomes have been reduced, and wage subsidies and mortgage deferrals give households and businesses time to regroup.

“However low interest rates will make it harder for depositors who depend on their investment income, and will continue to compress bank lending margins.”

McLean said he expected business customers to be affected but the wage subsidy had created a short-term buffer for many of them.

Many had not even been able to assess the health of their businesses through the level four lockdown, he said.  'Now they are coming back and can look at their prospects.'

McLean said any unemployment spike, such as that predicted to hit New Zealand this year, would cause pain to households and businesses. 

Up to the end of April, Westpac had granted mortgage and personal loan relief to 22,118 customers and provided $1.4 billion of new lending to 1129 business customers.

It had converted $1.4b of business loans for 1,560 business customers to interest-only or reduced repayments; and received more than 600 applications for Business Support Loans, which are offered through the Government’s Business Finance Guarantee Scheme. 

The bank's impairment charges lifted to $211 million in the half, from $14m.