Major bank reports drop in mortgage applications

On Monday (5 November), Westpac Group released its 2018 full-year results, revealing a “flat financial result” after a “difficult year”.

The banking group noted that despite the economic environment remaining “supportive”, the year to 30 September 2018 involved “tough operating conditions for banks, with higher regulatory, compliance and funding costs, and increased competitive pressure, particularly in the second half”.

Further, the bank result was impacted by provisions for customer refunds and related costs (largely related to its financial advice issues), along with legal costs, which totalled $281 million after tax (equivalent to 3.5 per cent of cash earnings).

Total loans grew by 1 per cent over the year, with most of the rise due to an increase in Australian mortgage lending.

Other areas of growth included 3 per cent growth in SME business lending and 1 per cent growth in commercial loans. In New Zealand, lending was up by 2 per cent (down by 1 per cent in A$ terms) from growth in mortgages.

Fewer people applying for loans with Westpac Group

While Westpac Group CEO Brian Hartzer said that Westpac’s mortgage book remains “fundamentally sound”, with nearly 70 per cent of Australian customers ahead on repayments and 90-day delinquencies remaining low, the bank results showed that its Australian mortgage growth was “moderating”.

The first half of the year resulted in a 10 per cent drop on the number of new loans (when compared to the previous half) coming through the group, while the second half of the year saw a 5 per cent drop in incoming mortgages.

Despite the fall in the number of new loans written, however, the value of mortgages continued to rise. The average loan size increased by 7 per cent in the year, with 6 per cent of this increase coming in the first half of the year.

As at September 2018, the average loan size being written with the banking group was $273,000, up from $264,000 as at September 2017.

Overall, the banking group’s total Australian loan portfolio was up by 4 per cent on the year (from $427.2 billion as at September 2017 to $444.7 billion by September 2018), below system growth, with $10 billion of this written in the first half of the year.

Looking at the make-up of loans, owner-occupied loans increased by 6 per cent over the year, while the group’s investor property lending grew by 2 per cent.

Principal and interest loan flows represented 77 per cent of all new flows and now comprise 61 per cent of the portfolio (up from 50 per cent as at September 2017), with the group holding its proportion of new interest-only mortgages to less than 30 per cent of new flows (at 23 per cent of new mortgage limits for the half), as required.

Additional expense checks slowing down first-party origination

The heads of the bank noted that there was decrease in the proportion of loans written through the first-party channel, which has been steadily decreasing year-on-year.

For example, as at September 2016, the bank was writing 57.9 per cent of its loans, which dropped to 57.3 per cent by September 2017. This figure now sits at 56.1 per cent.

However, the banking group revealed that it expects good take-up of its new, fully digitised mortgage process (the Customer Service Hub) that will launch through Westpac and St.George next year. It is expected that this will be extended to the broker channel by 2020.

Speaking of the behaviour at the investor briefing on Monday, Westpac’s chief financial officer, Peter King, noted that the bank had “adjusted” its credit policies in the past year, including by increasing expenses verification checks.

Mr King commented: “We have adjusted our policies… the standard credit policies, [so] what has happened this year is, effectively, an increase in verification. So, we’ve had 13 expense categories and we’re spending more effort and we have more people reviewing applications.”

It is this new process that CEO Brian Hartzer attributed to the slowdown in loan volumes.

Mr Hartzer told investors: “We’ve probably seen a slowdown in the Westpac first-party origination this year, largely as a result of all the extra effort put into some of the verification work that has frankly distracted people a bit. [It has] made the processes a bit longer, and we expect to address that this year.”

However, Mr King emphasised that “the interesting thing is, it hasn’t seen a reduction in average balances; we’re just seeing [fewer] people applying for loans — that has been the interesting piece”.

Net interest margins were up by 2 basis points over the year, although the trends were different across the halves. For example, in the first half of 2018, margins were higher, lifted by the repricing of investor and interest-only mortgages in late 2017, higher deposit spreads and increased Treasury income.

However, margins were 12 basis points lower in the second half (compared to the first), which the bank has attributed to “intense” competition and customers continuing to switch to lower spread products (including the switching of interest-only lending into principal and interest loans).

Customers reportedly switched $15.9 billion of interest-only loans to principal and interest during this period, meaning that interest-only loans now comprise 35 per cent of the total portfolio (down from 46 per cent last year).

Profit up marginally

Overall, the group reported a statutory net profit of $8.06 billion, up by 1 per cent, and cash earnings were little changed at $9.07 billion.

Cash earnings per share were down by 1 per cent (to 236.2 cents), while the cash return on equity (ROE) was at the “lower end” of target at 13 per cent.

The Westpac board has determined an unchanged, final, fully franked dividend of 94 cents per share to be paid on 20 December 2018.