A RAPID decline in bad debts is expected to propel the expanded Westpac group to a record half-year profit of about $2.7 billion.
This will help close the earnings gap that had begun to open with its major rival, Commonwealth Bank.
Westpac, which now includes St George Bank, surprised investors and analysts yesterday with a trading update that showed that its first-quarter cash earnings had jumped $400 million - or 33 per cent - on the corresponding period a year ago to $1.6 billion.
Three-quarters of that figure is expected to flow directly to Westpac's after-tax bottom line for its first half, which ends on March 31.
That had analysts at UBS yesterday upgrading their earnings forecast of $2.45 billion by $300 million. If realised, that result would put Westpac within touching distance of CBA's latest half-year record profit of $2.9 billion.
Westpac's shares jumped $1.44, or 6 per cent, to close at $24.74.
The improvement has been attributed to a lower than expected impairment charge during the quarter of $400 million, primarily due to fewer bad loans in its institutional division.
Market observers had forecast a charge of double that amount for each of the four quarters of Westpac's 2010 financial year. Even if that blows out, the benefit from the first three months to December 31 should still see a significant improvement in annual earnings.
Net cash profit for the year is now likely to come in at $5.5 billion, according to UBS, and could even reach $6 billion if bad debts continue to fall at the present rate.
In contrast, CBA, whose $79 billion market capitalisation puts its value $6 billion higher than Westpac, is now on target to make an annual profit of $6 billion this year after its strong half-year performance. Westpac told the ASX yesterday it had been primarily focused on sorting out its existing bad-debt problems - which built up during the global financial crisis - rather than ''uncovering new sources of stress''.
Even in the commercial property sector, which had been hardest hit during the crisis, there were signs of an improving outlook, with valuations stabilising and investor sentiment strengthening, especially after capital raisings by listed companies to reduce debt.
Westpac chief executive Gail Kelly said the bank's recent performance showed that there were clear signs of improvement in the domestic economy.
