Forecast Says Westpac Profits May Buckle

Westpac's (ASX:WBC) future profits can be threatened as its institutional banking business copes with cut-throat competition from major banks and a nearly stagnant demand for credit. Institutional bank profits are expected to drop at least 4 percent this year and 3 percent in 2012, according to a report from Morgan Stanley.

"A rise in competition suggests that margins in 2011 and net interest income will decline," said Morgan Stanley analyst Richard Wiles. "We believe that market volatility in recent years which means that institutional banks in Australia have been over-earning. We expect that Westpac's institutional bank earnings will be lower in 2013 than it was in 2010."

Business and corporate lending in its institutional business contributes a quarter of Westpac's earnings and the forecast drop may end Westpac's distinction as best performing business.

The recent jump in mortgage arrears in the bank's half-year results already caused analysts to doubt whether the company could coast on its profit growth stream. Since integrating with St George, Westpac has grown wary in its business lending as chief executive Gail Kelly has shifted the spotlight on residential mortgage lending.

Forecast says that business credit demand should rally by almost 6.5 percent annually after the lull that hit major banks over the past 18 months.