Australia's Westpac annual profit down as costs overshadow margin bump

By Archishma Iyer and Byron Kaye

(Reuters) -No.2 Australian mortgage lender Westpac said on Monday annual profit dipped as costs associated with a technology overhaul outweighed an improved loan margin, but upped its final dividend and extended a share buyback, nudging its shares up.

The result, which was better than feared, shows a company navigating what it hopes is the final stretch before the Reserve Bank of Australia begins cutting interest rates, which will make it easier for borrowers to service debt and ease upward pressure on costs.

Westpac forecasts the central bank will cut rates in February, which would be the country's first in five years.

Profit for Australia's oldest bank declined 3% for the year ended Sept. 30 to A$6.99 billion ($4.61 billion), bettering an LSEG estimate of A$6.50 billion.

Its net interest margin (NIM) - a closely-watched metric of takings from loan repayments minus outgoings for interest paid to deposit holders - widened to 1.97% from 1.89% from the first half to the second half, even amid fierce competition to sell mortgages.

But spending on a multi-year software overhaul and other inflationary pressures brought a 7% blowout in operating costs, dragging the bottom line result lower. Westpac upped its final dividend and said it would buy back another A$1 billion ($660 million) of stock.

Westpac shares clawed back early declines to trade 0.2% higher by midsession, in line with the broader market, as analysts looked past the weaker profit to signs of an improvement in profit margin.

"The underlying NIM trends we think look encouraging, although a period of higher-than-expected cost growth might dampen some of this benefit," UBS analysts said in a note.

Westpac said late loan payments ticked higher but mortgage delinquencies had stabilised. The company added that its loan impairment charges, while higher than a year ago, were a smaller proportion of its total loans.

Hardship packages, which banks offer to borrowers in difficult circumstances to ease their repayment obligations, peaked in June and were starting to come down, Westpac CEO Peter King said.

"That says to me people have gotten used to these higher interest rates," he said, delivering his last results before retiring.

Westpac declared a final dividend of 76 Australian cents per share, compared with 72 Australian cents a year earlier.

Rival lenders ANZ and National Australia Bank are expected to report full-year results on Nov. 7 and Nov. 8 respectively, while No.1 lender Commonwealth Bank gives a first-quarter trading update on Nov. 13.

($1 = 1.5161 Australian dollars)

(Reporting by Byron Kaye in Sydney and Archishma Iyer and John Biju in Bengaluru; Editing by Chris Reese, Subhranshu Sahu and Sonali Paul)