Westpac: Solid Update Fails to Calm Market Concerns on Margins, Operating Costs, and Bad Debts

Westpac’s third-quarter 2023 update was a little better than we expected, prompting a 3% upgrade to our fiscal 2023 profit forecast, and no change to our AUD 28 fair value estimate. Net interest margin being up 10 basis points on the first half to 2.06% is a welcome sight, but it masks an underlying downward trend reflecting competitive pressures. Still, excluding gains on hedges, NIM only fell 2 basis points to 1.96%. It is a positive outcome given we’d had some concerns around the impact of discounting being undertaken to restore momentum in home lending. On this front Westpac is making headway on growing in line with the system, growing ahead of the market in June. We still expect NIM to soften further in fiscal 2024 due to funding cost pressures, but given weak margins and poorer-than-expected returns smaller banks are reporting, competitive intensity is expected to gradually ease.