Westpac's Resilient Asset Quality Shields Against Profit Slump in H1 2025

Westpac Banking Corp. (WBC.AX) reported a modest 1% decline in net profit for the first half of 2025, but investors may want to look past the headline figure. Beneath the surface lies a story of strengthened credit metrics, robust loan growth, and a fortress-like balance sheet—key pillars that could position the bank to outperform peers in an uncertain economic environment.

While the bank’s shares have underperformed broader market indices in recent quarters, the fundamentals suggest this correction may be overdone. Let’s break down the numbers.

Profit Performance: A Dip, Not a Decline

Westpac’s net profit after tax for H1 2025 settled at A$3.32 billion, falling just short of analyst expectations but aligning with management’s cautious outlook. The drop stemmed from a 5.6% rise in operating expenses to A$5.70 billion, driven by A$1.48 billion in technology investments tied to its UNITE program. CEO Anthony Miller framed this as an investment in long-term resilience: “We’re building a bank for the next decade, not the next quarter.”

The core Net Interest Margin (NIM) held steady at 1.80%, a testament to disciplined balance sheet management. However, the Common Equity Tier 1 (CET1) ratio dipped to 12.2%—down 31 basis points (bps) from a year earlier—due to regulatory adjustments and asset growth. While this metric is slightly lower, it remains comfortably above the 10.5% regulatory minimum and signals no immediate capital stress.

Asset Quality: A Turning Point in the Credit Cycle

The real star of Westpac’s results is its asset quality, which has stabilized or improved across key metrics:

1. Credit Impairment Charges:
2. Fell to 6 basis points (bps) of average loans in H1 2025, a 34% drop from 9 bps in the same period of 2024.

3. Total impairment provisions rose only 1.2% to A$5.14 billion, reflecting reduced expectations of loan defaults.

4. Mortgage Delinquency Rates:

5. Held steady at historically low levels, with no material uptick despite high inflation and record household debt. Management cited “consumer resilience” as a turning point in the credit cycle.

6. Loan Growth:

7. Total loans surged 5.1% year-on-year to A$824.81 billion, driven by 14% growth in business lending and 15% expansion in institutional lending. This growth occurred without compromising underwriting standards, as evidenced by the low impairment charges.

Liquidity and Capital: A Fortress Balance Sheet

Westpac’s liquidity ratios remain enviable:
- Liquidity Coverage Ratio (LCR): 135% (well above the 100% regulatory floor).
- Net Stable Funding Ratio (NSFR): 115% (also exceeding the 100% minimum).

Deposits grew 7% annually, with household deposits up 9%, providing cheap funding and reducing reliance on volatile wholesale markets. This liquidity strength, coupled with stable NIM, positions Westpac to weather potential rate cuts by the Reserve Bank of Australia (RBA), which could otherwise compress margins.

Challenges on the Horizon

The bank isn’t without risks. The A$5.70 billion in operating expenses—a 5.6% jump—compresses margins and underscores the cost of digital transformation. Additionally, if the RBA cuts rates further, net interest margins could face downward pressure.

Yet, management argues these costs are strategic investments in AI-driven risk systems and cybersecurity, which could pay dividends in future efficiency and risk mitigation.

Conclusion: A Defensive Play in Uncertain Times

Westpac’s H1 results paint a picture of a bank that’s navigating a challenging environment with discipline. While the profit dip is a speed bump, the improved credit metrics, fortress liquidity, and disciplined loan growth suggest it’s well-positioned to capitalize on future opportunities.

Investors seeking stability in an era of economic uncertainty should note:
- Asset quality has bottomed: Credit impairment charges are at multi-year lows, and delinquency rates are contained.
- Strong capital and liquidity buffers: CET1 remains robust, and liquidity ratios exceed regulatory requirements.
- Dividend sustainability: Westpac’s dividend payout ratio is 25% of profit, leaving ample room for shareholder returns even if earnings flatten.

While the stock has lagged peers this year, the underlying fundamentals suggest it’s a safer bet in a sector prone to volatility. For income-focused investors, Westpac’s 6.2% dividend yield—among the highest in the Big Four banks—adds further appeal.

In short, Westpac’s stumble in profit growth is a temporary setback. The bank’s focus on credit discipline, liquidity, and long-term investments positions it to thrive when the cycle turns. This is a bank to own when markets are nervous.