May 6, 2018 / 10:28 PM / 21 days ago

UPDATE 2-Australia's Westpac warns of slower mortgage growth

* Westpac sees lower mortgage volumes

* Reports A$4.3 bln in cash earnings, beats forecasts

* Bank reports higher margins offseting soft growth in mortgages

* Stressed assets to total loans increased slightly (Recasts, adds CEO comments, portfolio manager)

By Paulina Duran

SYDNEY May 7 (Reuters) - Australia’s Westpac Banking Corp flagged lower mortgage volumes on Monday as it reported better-than-expected half-year earnings, saying the cooling housing market and tighter lending standards would squeeze growth.

Westpac echoed comments last week by smaller rival Australia and New Zealand Banking Group that mortgage growth would slow due to regulation and more cautious lending practices amid an inquiry into financial sector wrongdoing.

“With the changes that have come through in the last year we may see that growth rate fall a bit,” Chief Executive Brian Hartzer said in an interview published on its website on Monday, referring to tighter credit and loan approval policies.

“But what that represents is an orderly slowdown in the housing market, which shouldn’t be confused with a reduction in the housing market.”

Home prices across Australia’s major cities eased for a seventh straight month in April, according to property consultant CoreLogic.

Australia’s financial sector has been rocked by the government-ordered inquiry’s almost daily revelations of wrongdoing, including fraud, deception of regulators and charging customers without providing services.

The inquiry is raising costs as banks prepare for tougher oversight of their lending practices and wealth management divisions.

Hartzer said the inquiry, which is due to last a year, provided a “critical opportunity to restore customer trust”, and Westpac was “already well advanced” in making reforms.

HIGHER MARGINS

Westpac, Australia’s No. 2 lender, reported a cash profit of A$4.25 ($3.2 billion) for the half-year ended March 31, 6 percent higher than a year ago and slightly better than the average A$4.17 billion expected by four analysts polled by Reuters.

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

Higher margins after interest rate rises at the peak of the housing boom last year were offset by softer mortgage volumes, with home lending growth at two percent compared with three percent in the previous half.

Net interest income rose 8 percent to A$8.3 billion, while net interest margin - a key barometer of profitability - was up 11 basis points to 2.16 percent.

“The result is a good result driven by considerable margin expansion and lower bad debts,” said Omkar Yoshi, portfolio manager at Regal Funds Management, which owns Westpac shares.

Westpac shares were 1.5 percent higher at A$29.54 at 0326 GMT while the rest of the market was up 0.5 percent.

Stressed assets as a percentage of total loans were four basis points higher at 1.09 percent compared with the end of September, the bank said. The metric was lower than the 1.14 percent reported this time last year, suggesting loan quality was improving gradually.

Last month, Westpac was forced to defend the quality of its mortgage book, as documents it provided to the quasi-judicial inquiry raised doubts about its lending standards.

On Monday, it said it had reviewed a number of concerns raised by the banking regulator and tightened controls of its loan application processes.

$1 = 1.3270 Australian dollars Reporting by Paulina Duran in Sydney, and Rushil Dutta in Bengaluru; Editing by Stephen Coates

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