November 4, 2018 / 9:11 PM / 14 days ago

UPDATE 2-Australia's Westpac says profit hurt as legal costs, refunds mount

* Westpac reports flat annual earnings, H2 down 10 pct

* Profits hurt by costs of remediating customers, lower margins

* Westpac CEO says house prices to cool further (Adds details on H2 performance, CEO comments on outlook, inquiry costs, background, shares)

By Paulina Duran

SYDNEY, Nov 5 (Reuters) - Australia’s second-biggest lender Westpac Banking Corp reported flat annual cash earnings growth on Monday, missing expectations, as refunds and legal costs soared in the wake of a damaging public inquiry.

Westpac said higher costs for remediation and mortgage-funding hurt profit after the inquiry into financial-sector misconduct exposed widespread wrongdoing and poor governance across the industry.

“While the economic environment remains supportive, this result reflects the tough operating conditions for banks, with higher regulatory, compliance, and funding costs, and increased competitive pressure,” Chief Executive Brian Hartzer said in a statement.

Cash earnings for the year to Sept. 30 were A$8.07 billion ($5.8 billion), dragged down by a 10 percent decline during the second half as Westpac began compensating wronged customers and borrowing costs crimped margins. The result was lower than an average estimate of A$8.18 billion from six analysts polled by Reuters.

Cash profit, a measure that excludes one-offs and non-cash accounting items, is closely watched by investors.

The powerful inquiry known as a Royal Commission has heard that banks were lending without doing basic customer checks, took fees from customers’ accounts without providing them with services, and incentivised staff to commit fraud.

In one case, Westpac admitted to signing up a legally blind pensioner as loan guarantor for her daughter’s business without warning her of the risks, and then threatened to evict her when the business failed.

Westpac said it had booked a A$380 million charge to account for refunds, the costs of remediating wronged customers and higher litigation costs. It also spent an extra A$62 million in expenses associated with the inquiry.

Earlier in the year, Westpac admitted it had acted “unconscionably” when it attempted to manipulate a key money market rate, and agreed to pay a A$35 million fine for wrongly approving thousands of mortgages.

HOUSING DOWNTURN

Net interest income during the second half fell three percent, hit by lower markets income, subdued growth in home loans and higher funding costs.

“We expect house prices to cool further, and investor demand to remain weak,” Hartzer said.

He said consumers are likely to be more cautious in the face of flat wages growth and a soft housing market amid uncertainty ahead of a federal election due by May 2019.

Property consultant CoreLogic last week said home prices nationally had fallen for a 13th straight month in October, leading to an annual fall of 3.5 percent, the weakest since February 2012.

Net interest margin - a barometer of profitability - from its flagship consumer lending arm fell 26 percent during the half, hurt by higher short-term interest rates and remediation costs.

That was in line with falls at Australia and New Zealand Banking Group and National Australia Bank, which reported lower full-year profit last week, dragged by remediation costs and lower margins.

Westpac shares were 0.08 percent higher on Monday trading at A$26.48, while the broader market was 0.37 percent lower.

Commonwealth Bank, the biggest of the four, reports first-quarter results on Wednesday.

Westpac declared a final dividend of A$0.94 per share, the same as last year. ($1 = 1.3918 Australian dollars) (Reporting by Rushil Dutta in Bengaluru and Paulina Duran in Sydney; Editing by Stephen Coates)

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