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Westpac bad debts rise but consumers resilien -

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EDMOND ROY: The head of Westpac Gail Kelly has warned that unemployment will rise and so too will
interest rates.

The bank says cash earnings for the three months to June came in at about $1.1 billion. Bad debts
increased as the downturn hit small and medium sized businesses.

And in other economic news Insurance Australia Group has returned to profit.

To explore these and other financial matters I'm joined in the studio by our finance reporter Sue
Lannin.

Sue, Gail Kelly has been holding a conference call with analysts and journalists, what did she have
to say?

SUE LANNIN: Well Edmond, Gail Kelly says Westpac is in fact in good shape despite the challenging
operating earnings. Now as you said the unaudited cash earnings came in at $1.1 billion. That's
about the same as this time last year.

The big thing though was the small rise in bad debts to $865 million and on hearing that, investors
didn't like that news and shares around 3 per cent.

Now the rise in bad debts mainly came from New Zealand and that was because of mostly two
companies. There was a rise in write-downs because commercial property values have dropped.

But also in Australia we are seeing a rise in bad debts so there was an increase in loan defaults
from small and medium-sized companies.

And Westpac has put more companies on its watch-list but it doesn't think there will be a big rise
in loan defaults and Gail Kelly is maintaining a cautious outlook.

GAIL KELLY: I think a key factor domestically has been the much improved consumer and business
confidence. And of course the stronger than expected economic recovery in China is also important
for us here in Australia.

Now while we like everyone else is pleased with these developments we would caution that it's early
days, in particular on the risk front. The bad debt cycle is continuing to work its way through and
I think you can see evidence of that in our third-quarter results. And it's difficult to be precise
as to when the impairment cycle may peak.

EDMOND ROY: That's Westpac chief executive Gail Kelly there.

And Sue how are Westpac retail consumers do?

SUE LANNIN: Well Gail Kelly says that they are remarkably resilient and actually she gave some
evidence for that. She said that the number of customers not repaying loans for 90 days has fallen
and also the number of customers not repaying home loans for 30 days is also down.

Overall there was a small rise in lending, especially on the mortgage side, but business lending
has slowed.

And we've been hearing from the Reserve Bank that interest rates will rise sooner rather than later
and Gail Kelly also backed that up. She again indicated that home loan interest rates are on the
way up.

GAIL KELLY: But a key point to note here, and I mentioned it earlier in the risk section, is our
average cost of funding continues to increase and we will need to continue to adjust for this in
customer pricing.

EDMOND ROY: That's Gail Kelly there again.

Now I'm presuming here there's some good news for IAG members as well.

SUE LANNIN: Yes, for investors there's some good news. The home and car insurer has turned around
its financial performance. It made a loss for the 2008 financial year. This time in, in 2009, it's
had a net profit of $181 million.

It made more profits from insurance. In fact those profits were up about a third but that
performance was actually lower than expected. That's because there was a disappointing performance
in New Zealand. They made a loss in the first half of the year. And also natural disaster costs
were higher than expected because of the bushfires in Victoria. But the company is expecting better
times ahead.

The not-so-good news for customers is that there's higher insurance premiums.

The chief executive Michael Wilkins says it's a year of rebuilding and he's happy with this year's
result.

MICHAEL WILKINS: We're very satisfied with the performance that we've delivered in 2009. If you
look at it we've delivered in excess of a 3 per cent improvement in the underlying insurance margin
and more importantly we've actually established a very solid platform for 2010 and beyond.

EDMOND ROY: And that was chief executive of IAG Michael Wilkins.

And thank you Sue Lannin.