Westpac raises buffers for bad loans as it braces for slowdown

Westpac has raised its buffers for soured loans as it prepares for a weakening in the economy due to the Middle East war, even as its latest results showed fewer borrowers were struggling with repayments.

The country’s second-largest mortgage lender on Tuesday said it was increasing its provisions for bad debts, a sign the bank is preparing for a softer economy and disruption from the energy crisis, as it notched up $3.4 billion in first-half profits.

The results included about $200 million in extra provisions for bad debts compared with the previous half, as the lender sought to protect its balance sheet from potential losses caused by pain inflicted on energy-intensive sectors.

Ahead of Tuesday’s Reserve Bank decision on interest rates, which is expected to result in a rate rise, Westpac reaffirmed it expects more pain for borrowers, tipping three more rate hikes, which would take the cash rate to 4.85 per cent.

Chief executive Anthony Miller said he thought the economy would avoid a recession, and his bigger concern was that business investment decisions would be put on hold because of uncertainty.

“At the moment we don’t forecast a recession, but people who talk with absolute certainty today in this environment, I think, are misinformed because it’s an unusual environment in which we’re in, and there’s no doubt that there’s a lot of competing forces here,” he said.

Miller said that while higher interest rates were slowing the economy down, price rises caused by the energy crisis could also dampen spending in the economy, which could mean fewer rate rises were needed.

“I do think the uncertainty is the bigger issue here because the thing that I’m more worried about… is that businesses and investment decisions are put on hold,” he said.

Miller said that although the latest results showed the number of customers in financial distress had declined, the bank was being prudent in raising its provisions.

Westpac, the country’s second-largest retail bank, said its deposits and loans grew more than 7 per cent over the year, with its total loans rising to $890.3 billion as customer deposits hit $745.2 billion. Stressed loans fell 12 basis points from the September half, to 1.16 per cent of total exposures.

As well as forecasting higher interest rates, the bank is tipping an increase in unemployment to 5 per cent by early next year, compared with 4.3 per cent currently.

More to come.

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