Business News

Westpac’s profit surge reflects RBA’s bias towards banks, critics say

Westpac cashes in on interest rate hikes

Westpac’s net interest margin, which measures the difference between the interest it collects on loans and the interest it pays to fund them, rose by 10 basis points to 2.11% over the year. This was mainly driven by the RBA’s decision to raise the cash rate three times since November 2022, from 4.1% to 4.35%. The bank passed on the full rate hikes to its variable rate home loan customers, while keeping its deposit rates low. As a result, Westpac’s net interest income increased by 4% to $15.7 billion.

The bank also benefited from a rebound in credit growth, especially in the housing market. Westpac’s home loan portfolio grew by 6% over the year, reaching $472 billion. The bank said it had gained market share in owner-occupier lending, while reducing its exposure to investor lending. Westpac’s business lending also grew by 4% to $116 billion, reflecting the recovery in business confidence and activity.

Westpac’s profit surge reflects RBA’s bias towards banks, critics say

Westpac rewards shareholders with buyback and dividend

Westpac’s shareholders were pleased with the bank’s performance, as the bank announced a $1.5 billion share buyback and a final dividend of 80 cents per share. The buyback, which will commence in December 2023, is part of the bank’s plan to return excess capital to shareholders, following the sale of its life insurance and wealth platforms businesses. The dividend, which is up from 58 cents in the previous year, represents a payout ratio of 70% of the bank’s cash earnings.

Westpac’s chief executive Peter King said the bank had delivered a “solid result” in a challenging environment, and was well positioned for the future. “We have made good progress on our strategic priorities, simplifying our business, improving our efficiency, and strengthening our balance sheet,” he said. “We are also investing in our core businesses, enhancing our digital capabilities, and supporting our customers and communities.”

RBA’s inflation-targeting regime under fire

However, not everyone was impressed by Westpac’s profit surge. Some critics have argued that the bank’s profit growth reflects the RBA’s bias towards the banking sector over the households, as part of its inflation-targeting regime. The RBA has been raising the cash rate to keep inflation within its target range of 2-3%, despite the high unemployment rate and the low wage growth. The RBA’s governor Philip Lowe has defended the rate hikes, saying they are necessary to prevent inflation from becoming entrenched and eroding living standards.

However, some economists and commentators have challenged the RBA’s inflation-targeting framework, which is based on the idea of the non-accelerating inflation rate of unemployment (NAIRU), also called the “natural rate of unemployment”. This is the rate of unemployment that is consistent with low and stable inflation, and is estimated by the RBA to be around 5%. According to this framework, the RBA should raise the cash rate when the unemployment rate falls below the NAIRU, to prevent inflation from rising above the target range.

However, some critics have pointed out the flaws and limitations of the NAIRU concept, such as its variability over time, its difficulty to measure, and its neglect of the potential of the workforce. They have also argued that the RBA’s inflation-targeting regime has contributed to the decline in the wage share of national income over the last three decades, as the RBA has prioritised low inflation over full employment. They have called for a more balanced and flexible approach to monetary policy, that takes into account the broader economic and social objectives, such as reducing inequality, enhancing productivity, and promoting sustainability.

Leave a Reply

Your email address will not be published. Required fields are marked *