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Cost worries dampen Westpac profit rebound

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Worries over rising costs and a squeeze in margins have dampened enthusiasm for Westpac's results despite the banking major posting a sharp rebound in annual earnings and unveiling a $3.5 billion share buyback.

Australia's second-largest lender on Monday reported full year cash earnings more than doubled to $5.35 billion after it wound back some provisions to cover potential COVID-related loan losses.

Statutory net profit for the 12 months to September 30 was 138 per cent higher at $5.46 billion, allowing it to lift its final dividend.

Westpac also unveiled an off-market share buyback of up to $3.5 billion - becoming the last of the Big Four banks to do so, after considering the improved economic outlook and its strong capital position following a number of asset sales in the past year.

Still, shares in the lender slumped more than six per cent to their lowest level since March as investors fretted that cost and margin pressures seen in the "challenging" second half of the fiscal year would continue.

By 1500 AEST, Westpac shares were down 6.5 per cent to $23.99.

"Our operational performance has improved, our financials are not yet where we want them to be," chief executive Peter King said.

Westpac's performance lagged in the second half of the year, with cash earnings declining at each of its businesses.

Core earnings in the second half were 13 per cent lower than the previous half, while expenses rose by $464 million as the bank hired more than 3,200 additional staff to support its risk and compliance functions and handle the increased volumes in the key home loans unit.

Unlike smaller rival ANZ, Westpac managed to expand its mortgages portfolio by 3 per cent over the year but this came at the cost of margins in a competitive market.

As a result, the lender's overall net interest margin, which reflects the difference between what banks charge versus the cost of a loan, fell 4 basis points to 2.04 per cent.

"This performance highlights the ongoing pressure on banks' net interest margin, which we expect to continue due to lending competition and low interest rates, as well as higher levels of liquid assets as APRA phases out banks' reliance on the RBA's Committed Liquidity Facility," ratings agency Moody's said.

This comes on top of the bank last month announcing writedowns worth $1.3 billion, including a $967 million hit at its institutional banking unit and additional provisions for customer refunds and litigation costs.

But Mr King said overall credit quality had remained good, with stressed exposures continuing to decline after last year's peak, while mortgage delinquencies were also significantly lower.

That helped it write back $590 million of the provisions it had made at the peak of the pandemic last year, when earnings had slumped.

Westpac expects economic growth to rebound over the coming months as NSW and Victoria reopen after extended lockdowns and consumer spending lifts.

It reported a common equity tier one (CET 1) capital ratio of 12.3 per cent at the end of September, comfortably above the prudential regulator's 10.5 per cent benchmark.

Despite the increased costs, the bank says it is continuing to make progress on its target to reduce its cost base to $8 billion by 2024, led by divestments and simplification of the operations.

Westpac will pay a fully franked final dividend of 60 cents a share, taking the annual payout to $1.18 a share.

WESTPAC FY PROFIT SURGES

* Revenue up 5.0pct to $21.22b

* Cash profit up 105pct to $5.35b

* Statutory profit up 138pct to $5.46b

* Fully franked final dividend 60cps vs 31cps

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