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Westpac lowers target after flat profit

AAP logoAAP 6/11/2016 Stuart Condie

Westpac has lowered its target for return on equity after a flat full-year profit of $7.822 billion, describing 15 per cent as unrealistic in a low interest rate environment that has no end in sight.

The lender held its final dividend at 94 cents but cash return on equity (ROE) dropped 1.85 percentage points to 14.0 per cent after the amount of capital held rose following the issue of new shares in November.

That response to stronger capital requirements also led to a drop in earnings per share but chief executive Brian Hartzer said previous benchmarks of profitability - such as the minimum 15 per cent ROE introduced by his predecessor Gail Kelly - no longer held.

"Given the current operating environment, including the expectation that low interest rates will continue for some time, the evolving regulations for capital and liquidity, and higher regulatory and compliance costs, the current 15 per cent ROE target for the group as a whole is no longer realistic," Mr Hartzer said on Monday.

"Westpac believes in maintaining strong return disciplines and will be seeking to achieve a ROE in the range of 13 per cent to 14 per cent in the medium term."

It marked a shift in approach, albeit one less dramatic than that of rivals National Australia Bank and ANZ.

NAB has, in the past few months, offloaded its underperforming Clydesdale Bank and sold 80 per cent of its life insurance business, while ANZ last week agreed to sell some of its retail and wealth management businesses in Asia and said its Australian life insurance, advice and superannuation businesses could be next on the block.

Financial services firm KPMG said there could be more change ahead for the big four banks, whose collective FY16 profit fell 2.5 per cent to $29.6 billion.

"It is inevitable that the majors will continue to refine their business models, being much more selective on which markets, products and customer segments to serve and those they may seek to pursue with a different approach - or exit altogether," KPMG national head of banking Ian Pollari said.

Cash earnings from Westpac's BT Financial Group wealth management arm fell four per cent, while those from its institutional bank fell 18 per cent, largely because of $215 million in impairment charges.

Overall impairment charges rose 49 per cent, mostly related to first-half downgrades, dragging net profit down 7.1 per cent to $7.445 billion.

Westpac said stressed exposures rose 0.21 percentage points to 1.20 per cent, reflecting low NZ dairy prices and the continuing fallout of the end of the mining boom, while Australian mortgages overdue by 90 days or more increased from 0.45 per cent to 0.66.

Cash earnings for the 12 months to September 30 from Westpac's Australian consumer bank surged 14 per cent to $2.981 billion as a three per cent rise in customers and eight per cent loan growth more than offset higher funding costs and increased competition.

Mr Hartzer said the bank was comfortable with its payout ratio of 80.3 per cent, up from 75.4 per cent a year ago as a result of the extra shares on market following the equity raising.

Westpac shares closed up * cents, or * per cent, at *. Their biggest one-day rise since July 11 made them the best performing shares of the big four banks.

WESTPAC'S FY16 FIGURES

* Cash profit flat at $7.822b

* Net profit down 7.1pct to $7.445b

* Net interest income up 6.2pct to $15.148b

* Final dividend unchanged at 94 cents, fully franked

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