Westpac's H1 2025 Results: Navigating Margins Amid Market Pressures

Westpac’s recent half-year results for H1 2025 reveal a mixed picture of resilience and challenges in Australia’s banking sector. While the bank’s Group Net Interest Margin (NIM) dipped to 1.88%, its core NIM held steady at 1.80%, underscoring disciplined balance sheet management. This article unpacks the drivers behind these figures, evaluates the risks, and weighs the investment case for Westpac (WBC.AX).

The NIM Dilemma: Group vs. Core Stability

Westpac’s Group NIM fell by 1 basis point (bps) from H1 2024 and 4 bps from H2 2024, reflecting intense competition in lending and term deposit markets. However, the core NIM—which excludes volatile items like Treasury income—remained unchanged at 1.80%, a 3 bps improvement from the prior half. This stability is critical: core NIM directly ties to the bank’s underlying lending and deposit strategies, which management claims are insulated from short-term market pressures.

Growth Drivers and Hidden Headwinds

Westpac reported a 2% year-on-year rise in net interest income to A$9.57 billion, driven by a 5% surge in total loans to A$825 billion. Australian business and institutional lending grew by 14% and 15% annually, respectively, signaling strong demand from corporate clients. Deposits also expanded by 7%, with household deposits up 9%, reinforcing the bank’s liquidity.

Yet, costs are escalating. The expense-to-income ratio hit 51.8%, a 2.5 percentage point increase from H1 2024, driven by investments in technology, the UNITE program (a multi-year transformation initiative), and wage inflation. These expenses ate into margins, highlighting a key risk: operating leverage remains elusive.

Credit Quality and Capital Buffers

On the bright side, credit metrics improved. Mortgage delinquency rates dropped, and impairment charges fell to 6 bps of average loans—a 34% decline from H1 2024. This resilience suggests Westpac’s loan book remains robust, even as global risks loom.

Capital ratios, however, softened. The Common Equity Tier 1 (CET1) ratio dipped to 12.2%, down 31 bps year-on-year, due to regulatory adjustments and asset growth. While still above regulatory minima, this signals potential constraints on future capital returns unless margins stabilize.

Dividend and Valuation Outlook

Westpac maintained its 76 cents per share interim dividend, fully franked, preserving a 75% payout ratio (excluding one-offs). With shares trading at a 1.3x price-to-book ratio—near its five-year low—the stock offers value if margins stabilize.

Conclusion: A Bank for the Long Game?

Westpac’s H1 results paint a nuanced picture. The stable core NIM at 1.80% and strong deposit growth suggest management is succeeding in its strategy to weather competitive pressures. However, the rising cost base and declining CET1 ratio introduce uncertainty.

Investors should focus on two key metrics:
1. Core NIM trends: If it holds above 1.8%, it signals sustainable margin discipline.
2. Expense control: A reversal of the 51.8% expense ratio would unlock profitability.

With a dividend yield of 6.2% and a dividend payout ratio below peers, Westpac offers income seekers a compelling option—if shareholders are patient enough to ride out near-term volatility. The bank’s improving credit quality and fortress-like liquidity (LCR of 135%, NSFR of 115%) further support its defensive profile.

In sum, Westpac remains a buy-and-hold candidate for investors prioritizing dividends and downside protection, provided the core NIM holds firm. For traders chasing quick gains, the path is murkier—unless the bank can rein in costs and reverse its CET1 decline.

Data as of 5 May 2025. Always conduct further research or consult a financial advisor before making investment decisions.