Westpac’s profit margins: Middle East war hits, bank flags more bad debts
The lender revealed its profitability took a hit from interest rate volatility in the Middle East conflict.
Australia’s second-largest lender Westpac has warned its profit margins are set to fall due to the Middle East war and surging volatility in interest rates.
On Tuesday morning, it told investors its net interest margin (NIM) for its treasury and markets operations — as a key measure of profitability — fell 8 basis points in the war-hit March quarter, versus the prior quarter to December 31.
“With the supply shock from the energy market disruption expected to result in higher inflation and higher interest rates, an expected slowing in economic growth will create a more challenging environment for some customers,” the bank said.
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By continuing you agree to our Terms and Privacy Policy.The bank’s shares fell 2.4 per cent to $41.58 in morning trade, with the flagship S&P/ASX 200 index up 0.4 per cent.
In the December quarter, the bank’s NIM was 1.94 per cent, comprising a core NIM of 1.79 per cent largely from profits on home loans and an additional 15 basis points from the trading activities of its Treasury and Markets team.
Tuesday’s update suggests its Markets team performed less well through the wild interest rate and fixed income market swings in March 2026 as its NIM fell from a 15 basis points contribution to 7 basis points.
Higher bad debt provisions
Westpac also warned of rising bad debts across the energy sector as it lifted credit impairment charges to 10 basis points of average gross loans.
“The revised economic outlook has been reflected in our base case provision scenario and a new portfolio overlay has been added in for energy-intensive sectors,” the bank said.
One senior interest rate trader at a big four bank, who spoke on condition of anonymity, said he believed Westpac’s trading team had been wrong-footed by large market moves associated with the Iran war.
“I heard they were betting on rates falling as they thought the equity markets would crash and we’d get a flight to quality and bond buyers,” he said. “It’s [the Middle East] been a very hard one to trade, you’ve really had to throw the economic books out the window.
“Now the Middle East has also shown some of these [lending] books are seriously under-provisioned for an energy shock. So, the stress test models they’re running now, will probably show they have to provision more for all the banks.”
Westpac also flagged a $75 million profit hit from transaction costs related to its RAMS home loan portfolio sale to Pepper Money and private equity group KKR. The impact will be booked in its interim profit on May 5.
Consumer confidence plunges
More data on Wednesday showed the Westpac-Melbourne Institute Consumer Sentiment Index for April posted its heaviest fall since the onset of the COVID crisis in early 2020.
“Australian consumers are being hit by another cost-of-living shock,” said Matthew Hassan the bank’s Head of Macro Forecasting. “The spike in fuel prices following the US–Israel war on Iran and a further 25 basis point interest rate increase are again putting finances under intense pressure.”
Westpac’s shares have soared nearly 40 per cent over the past 12 months as investors bet it can lift profits on expense management and Australia’s home loan lending market.
Other companies to announce hits to profitability from the war include manufacturing giant Orora, a2 Milk, and EML Payments.
Among Westpac’s rivals, shares in Commonwealth Bank rose 0.8 per cent on Tuesday lunchtime to $184.70, with National Australia Bank down 0.4 per cent.
