Westpac has reported increased delinquencies, more customer downgrades and higher levels of stress in its June quarter update.
Stressed exposures, which includes watchlist and substandard loans, delinquencies and impaired loans rose from 1.3 per cent of total committed exposures in March to 1.7 per cent in June.
Stressed exposures are now at their highest level since 2012.
Australian mortgage delinquencies, including hardship, rose 55 bps over three months to 149 bps.
The bank has contacted 85 per cent of its customers on mortgage deferral packages and, based on its discussions, expects 50 per cent to return to making normal repayments.
It had 78,000 outstanding mortgage repayment deferral arrangements at July 31 – down from the high point of 135,000. The value of mortgages on deferral has come down from A$51 billion to $30 billion – 7 per cent of the total mortgage portfolio.
Westpac added another $826 million of impairment charges in the June quarter, after charging $2.2 billion in the March half.
Most of the latest charge was a collectively assessed provision, with individually assessed provisions and write-offs were “largely unchanged”.
Thanks to the lower impairment, cash profit of $1.3 billion for the quarter was much stronger than the quarter average of $497 million in the March half.
However, net interest income was down quarter-on quarter as the bank suffered from lower lending balances.
The value of the Australian mortgage portfolio has fallen from $449.2 billion in September last year to $445.7 billion in March and $445.5 billion in June.
Ongoing margin pressure from lower interest rates pushed the net interest margin lower. NIM was down 8 bps to 2.03 per cent (11 bps excluding notable items).
From a capital ratio perspective, higher cash earnings were offset by higher risk weighted assets, which rose 27 bps during the quarter. The bank recognised a $7 billion RWA management overlay for corporate, business and specialised lending.
The bank said the higher RWA reflects “the impact of credit deterioration across the portfolio, together with overlays for potential further deterioration.”
The bank’s common equity tier 1 capital ratio slipped a touch from 10.81 per cent to 10.8 per cent over the three months.
Evans and Partners analyst Matthew Wilson said Westpac’s approach was a genuine attempt to be forward looking, “in contrast to CBA, which took the opportunity to model away $19 billion of credit risk weighted assets”.
The bank said it would not pay a March half dividend. It said: “Given the desire to retain a strong balance sheet and the ongoing uncertainty in the operating environment, the board has now decided it is prudent not to pay a first half 2020 dividend.”
Wilson said of the sector generally: “We expect bad debts to double from here, as government support eventually fades. This credit cycle is characterised by extreme levels of household debt.”