Australia's Westpac flags $950 mln profit hit, led by institutional banking

Australia's Westpac Banking Corp (WBC.AX) said on Tuesday it will take a one-off charge of $956 million against its second-half profit mainly due to a weaker earnings outlook at its institutional banking unit as well as remediation charges.

The country's second-largest lender by market capitalisation said a protracted period of low rates, "subdued" financial markets and its exit from energy trading would lead to lower earnings at the unit. The bank gave no further explanation of its exit from energy trading.

"Overall we think it is a setback for management as they look to build credibility with investors," said Citigroup banking analyst Brendan Sproules.

"Investors may raise questions around the timing as (interest) rates have been low for some time, and now potentially on the rise."

Australian interest rates have been at record lows since November 2020 but economists expect they will start rising again as soon as next year.

Westpac shares were 1.65% lower, after the bank said the A$1.3 billion one-off charge included provisions to pay out customers seeking remediation for wrongly charged fees, and costs associated with the sale of its life insurance unit.

The company cut the value of its Westpac Institutional Banking (WIB) unit by nearly A$1 billion after "reducing risk in the division through the exit of energy trading, consolidating our Asian operations and reducing our correspondent banking relationships which have all impacted earnings", it said in a securities filing.

"At the same time, medium term expectations of a prolonged low interest rate environment, subdued financial markets income and elevated compliance expenses have impacted WIB's earnings outlook," the bank added.

Payouts and other costs associated with settling customer lawsuits would add another A$172 million to the one-off charges, while selling costs and tax adjustments linked to the sale of its life insurance unit would add A$267 million to the one-off items.

"It was surprising to see they had more charges related to regulatory issues," said Adam Dawes, an investment advisor at Shaw and Partners Ltd. "We expected Westpac had already accounted for and fixed all those remediation costs."

The bank is scheduled to report annual results on Nov. 1, and was expected to post a cash profit of A$6.5 billion, according to the average forecast of 13 analysts polled by Refinitiv before the charges were announced, nearly triple the previous year's result which was impacted by COVID-19 loan repayment freezes and other macroeconomic shocks.