Next few months will be ‘critical’ for economy says Westpac NZ CEO

Westpac New Zealand chief executive Catherine McGrath.

Westpac New Zealand chief executive Catherine McGrath says the next few months will be critical for the economy.

McGrath said weakness among key trading partners such as China and a tense geopolitical environment were all contributing to uncertainty across the economy, which she described as sluggish.

“The dominant narrative right now is that economic weakness and tight financial conditions are weighing heavily on households and businesses,” she said.

Westpac, which reported an 11 per cent lift in first-half net profit to $477 million for the six months to March, expects subdued growth across the rest of this year and 2.4 per cent growth in 2025.

“I think we are in for a challenging time, particularly over the next six months,” McGrath told the Herald.

Westpac expects unemployment to peak in June next year and for interest rates to fall after Christmas.

“What we are hopeful of is that by the end of 2024 we will have a little bit more confidence and that we can see the light at the end of the tunnel,” she said.

“We feel more optimistic about what we are going to see in 2025.”

Mortgage repayment delinquency was up, at 0.47 per cent of the bank’s total lending from 0.33 per cent in 2023 and above the bank’s long-run average, but below its Global Financial Crisis peak.

The Reserve Bank said in last week’s financial stability report that banks were well positioned to manage further increases in mortgage arrears.

The RBNZ said banks expect the nonperforming share of their mortgage lending increase to 0.7 per cent by around the end of this year - around half what it was during the GFC.

On the positive side, McGrath said 66 per cent of Westpac’s mortgage borrowers were more than three months ahead on their repayments.

“There has been some resilience that people have been building in by staying just a little bit ahead of the curve,” she said.

Likewise, McGrath said the bank’s business customers were proving themselves to be “pretty resilient”.

“The next few months will be critical for getting businesses and communities on the same page to start unlocking our potential,” she said.

In commentary on the net $477m profit, the bank said its prior corresponding period included an overlay for the financial impacts of severe weather following last February’s Cyclone Gabrielle, which had since been removed.

Before provisioning, Westpac’s profit was $688m, down 8 per cent - a figure that was representative of the bank’s position, McGrath said, adding it showed strong competition for deposits.

Operating expenses were $695m, up 11 per cent, reflecting higher salary costs, inflation in supply costs and a lift in amortisation.

Net impairment charges were $23m, down from $154m in the previous period.

The bank’s net interest margin - the profit the bank makes on the money it takes in and then lends out - was a healthy 2.09 per cent, down 2 basis points on the same figure a year ago.

Looking ahead, McGrath said: “We’re heading into the second half of the year with good momentum and are well positioned to support further growth as the economy recovers.”

“Overall, we have fewer customers suffering hardship than we’d expected and most remain well-placed to manage ongoing cost pressures.”

In Australia, the parent company reported an A$3.3 billion ($3.6b) net profit for the first half, down 16 per cent.

However, the still strong profit out-turn allowed the bank to declare an A15c special dividend, on top of an A75c ordinary interim dividend.

Jamie Gray is an Auckland-based journalist, covering the financial markets and the primary sector. He joined the Herald in 2011.