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Westpac profit down, but worst over -

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Westpac profit down, but worst over

Peter Ryan reported this story on Wednesday, November 4, 2009 12:29:00

ELEANOR HALL: The Australian economy might have outrun a bullet in avoiding a recession, but
Australia's second biggest bank is preparing for more bad debts from the business sector.

Westpac executives say they are worried that large businesses with loans of between 10 and 100
million dollars remain under stress.

The bank's full year net profit fell but it still managed to net almost $3.5 billion even after the
blow out in bad debts.

And unlike the ANZ Bank, Westpac is not criticising the Reserve Bank's decision to raise interest

Westpac's chief financial officer Phil Coffey spoke in Sydney to our business editor Peter Ryan.

PHIL COFFEY: We would hope that we are now at the top of the credit cycle and that we will not see
our impairment charges move higher from the levels that we saw in 2009. But that's not to say that
there aren't continuing financial stress for business customers in various part of Australia and in
various industries.

PETER RYAN: What sort of businesses are feeling the most pain at the moment?

PHIL COFFEY: When we look at our portfolio I think a couple of areas I'd call out are in property
development. That's one area that's feeling pressure and pubs and clubs is another and obviously
with the stronger Australian dollar that's also starting to have an impact on manufacturers in
Australia who are competing with imports.

PETER RYAN: You've had to deal with some high profile corporate clients collapsing in the first
half. Are you still feeling the impact of that now or is it more in the business and consumer

PHIL COFFEY: I think it's certainly more in what we call the commercial segment of business. That's
customers who have facilities are generally between 10 and 100 million dollars. That's the area
that I think is feeling most financial stress.

Certainly the larger listed corporate have been able to get the support of the equity markets and
have raised capital that way and that's helped put their balance sheets in better shape and the
household sector actually is in a strong position. But that smaller middle sized business is really
where the pressure is being felt.

PETER RYAN: Do you expect that households are going to be hurting much more given that the Reserve
Bank is moving back to what they would call normalised interest rates?

PHIL COFFEY: Well we're certainly seeing you know the start of this tightening cycle and as you've
said moving interest rates back to more normal settings or off the emergency settings that the
Reserve Bank had moved to and higher interest rates are obviously going to cut into household

But by and large, rates are still in an absolute sense low and household borrowers have used the
low interest rates to get ahead on their payment schedule and so household debt delinquencies if
you like are actually very modest at this point in time.

PETER RYAN: Earlier this week the Treasurer unveiled a much more optimistic outlook for the
economy. Even so, unemployment is yet to peak. Does that mean that more bad debts are on the

PHIL COFFEY: You know our impairment charge to the household sector is absolutely related to
unemployment and it's one of the things that causes people to struggle to repay their debts when
they lose their job, not surprisingly.

The other thing that the Treasurer and other commentators have said is that they think the
unemployment rate will peak at a much lower level than perhaps they had been expecting a year ago.

So overall this downturn looks to us to be more moderate rather than a severe downturn and so we'd
be hoping that that means unemployment peaks at a lower level and therefore our bad debt's also not
as bad as it might have been.

PETER RYAN: On that basis, is it Westpac's view that the Reserve Bank might have jumped the gun by
raising rates too early?

PHIL COFFEY: I don't think we want to be critical of the Reserve Bank. I think they've done
actually an excellent job of supporting the government in terms of moderating the impact of what
was a tumultuous global event. So for the Australian economy to be able to achieve what wasn't even
a technical recession here was pretty tremendous and so, you know, if the Reserve Bank thinks that
it's appropriate to start tightening rates from those emergency lows then I'd be backing their

PETER RYAN: We've got the Reserve Bank winding back its stimulus by raising interest rates, but
what about the Federal Government's fiscal stimulus. Is it time for that to be slowly withdrawn?

PHIL COFFEY: Look, I think that the Treasurer's called out the logic for the Government's decisions
and I'll let that stand on that argument.

PETER RYAN: Will Westpac stick with the official increases from the Reserve Bank or move beyond?

PHIL COFFEY: Yesterday we moved our mortgage rate standard variable rate by 25 basis points which
was consistent with what the Reserve Bank had moved on cash rates. You know, we don't look to
pre-empt what the Reserve Bank's going to do and we don't try to forecast what we're going to be
doing in regard to that because there are lots of inputs into it. But our average cost of funds is
rising and that has to be one of the factors that we'll think about as we look at pricing decisions
in the future.

PETER RYAN: So do you see a real disconnect now between what the Reserve Bank does and what banks

PHIL COFFEY: You know the Reserve Bank moves are certainly one key input into it, but they're not
the only input. You know the two other large inputs show just how competitive the market is for
deposits and you've seen deposit rates move up more than and faster than the cash rate from the
Reserve Bank. So that's one factor and our wholesale borrowing rates from offshore which are for
much longer term periods have also been moving higher than they were pre the crisis. So both those
factors go into our cost of funds as well.

PETER RYAN: Finally, you're one year into the merger with St George Bank. How is that tracking?

PHIL COFFEY: Look we're really pleased with the merger. It's a transformational merger for the
Westpac Group and it gives us a suite of fantastically well known brands and very powerful brands
in terms of how customers think about dealing with it and many customers are still looking at St
George and saying when is the merger going to happen? Because St George people, their network, the
way they operate hasn't changed and that's exactly what we were looking to achieve.

ELEANOR HALL: That's Westpac's chief financial officer Phil Coffey speaking to our business editor
Peter Ryan. And the full version of that interview will be on The World Today website later today.