RETAIL BANKING | Tony Chua, Australia

Westpac profits faces threat from struggling unit

Analysts doubt on the lender’s ability to maintain its profit growth momentum, after the bank revealed a spike in mortgage arrears.

Westpac’s future profits could come under pressure as one of its biggest businesses -- the institutional bank -- struggles with flatlining credit demand and growing competition among the major banks to snare market share from each other.\

A new report from Morgan Stanley forecast that Westpac institutional banking earnings were likely to fall at least 4 per cent this year and 3 per cent next year, ending its run as the overall bank's best performing businesses, reported The Australian.

The institutional business -- which lends primarily to big business and corporates -- makes up 25 per cent of Westpac's earnings, meaning the forecast reductions will flow through to the bank's bottom line.
Analysts have already started to question whether Westpac can maintain its profit growth momentum, after the bank revealed a spike in mortgage arrears during its recent half-year results.

Morgan Stanley analyst Richard Wiles said Westpac's institutional bank was feeling the effects of margin pressure, increased competition and losing the benefits of volatile markets in its trading businesses.

The institutional bank's loan portfolio is estimated to have contracted by almost 20 per cent from $83.9 billion to $64.2bn since the peak of 2008. The estimated earnings slowdown could cost Westpac up to 2 per cent of its profits over the next two years in what Mr Miles said would be a "material headwind" for the bank's growth.
Westpac, since its integration with St George, has become more conservative in its business lending, with chief executive Gail Kelly focusing aggressively on residential mortgage lending.

View the full story in The Australian.

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