Westpac announced that impairment charges in its first half 2020 (1H20) result are expected to be $1.4 billion (AUD 2.2 billion or 2,238 million, pre-tax).
The impairment charge includes approximately $392 million (AUD 600 million) from individually assessed provisions and net write-offs, together with approximately $1.04 billion (AUD 1.6 billion) of additional impairment charges predominantly related to COVID-19 impacts.
This accords with the AASB 9 accounting standard, which requires Westpac to estimate certain expected future impairments and increase provisions before new defaults occur.
The $1.04 billion (AUD 1.6 billion) addition to the impairment charge has a relatively small impact on the group’s common equity tier 1 (CET1) capital ratio capital (11 basis points decrease). This is because the higher charge lifts provision levels and reduces the regulatory expected loss capital deduction to nil. Westpac’s CET1 capital ratio on 31 March 2020 was expected to be 10.8%.
Westpac’s CEO Peter King said, “The world is going through a once in a life-time health and economic crisis, and we are committed to assisting as many customers as possible to bridge this shutdown period. Our packages are already providing relief to individual and business customers. It is, however, unfortunate that some customers will not be able to navigate the financial and economic changes of this crisis and may not re-open. Nevertheless, we will work closely with those customers to help them through that process.”
“Having materially strengthened capital over the last decade, building significant buffers, we are well positioned to absorb this increase and respond to future developments in the environment,” King added.
The 1H20 impairment charge of $1.4 billion (AUD 2.2 billion) equates to approximately 62 basis points of gross loans (annualised). This compares to 13 and 9 basis points for 2H19 and 1H19, respectively.
The $1.04 billion (AUD 1.6 billion) in additional impairment charges has been principally based on three elements:
Westpac notes that the COVID-19 outbreak is still in its early stages and the impact on customers, along with future impacts on the bank, remain highly uncertain. While impairment provisions have begun to increase, the extent of additional charges in subsequent periods will depend on the severity and duration of the decline in economic activity as well as the size and effectiveness of stimulus measures. The group will reassess its provisioning levels as developments unfold.
Westpac’s 1H20 results are expected to be announced on 4 May 2020.
Re-disseminated by The Asian Banker