Westpac has posted a 12 per cent drop in first-half cash earnings to $3.1 billion, on the back of competitive pressures in the home loan market and increased provisions for bad debts.

Australia’s second-biggest bank by market value said statutory net profit for the six months to March 31 also dipped 5 per cent from a year ago to $3.28 billion.

Revenue for the half-year was down 4 per cent at $10.23 billion.

Westpac chief executive Peter King on Monday attributed lower earnings “mostly due to competitive pressures on net interest margins and returning to an impairment charge after having benefits last year.”

Still, asset quality has improved and most credit quality metrics are back to pre-COVID levels, he said.

The lender has, however, increased provisions to account for supply chain issues, inflation, expectations of higher interest rates and recent floods.

Westpac said its cost reset program helped offset the decline in revenue and increase in impairments, with costs down 10 per cent from the same period a year ago.

Unlike big four rivals ANZ and NAB, Westpac is also sticking to its $8 billion cost reduction target by fiscal 2024.

Earnings in its key consumer division, which includes the mortgages business, slid 15 per cent from a year earlier. Margins were down 25 basis points amid stiff competition in the home loan market and a low-rate environment.

As a result, net interest margins that reflect the difference between what banks charge versus the cost of a loan, slid 22 basis points to 1.85 per cent.

Going forward, Westpac is forecasting the economy to expand by 4.5 per cent in 2022 but slow to 2.5 per cent in 2023. Credit growth is forecast to be a strong 5.7 per cent in 2022.

Demand for housing has already shown some signs of easing, and rising interest rates are expected to contribute to a moderation in house prices next year.

“Consumer spending may be tempered by higher prices and higher interest rates,” Mr King said.

“However, the positives of strong household and business balance sheets, combined with the continued reopening of international borders and local economies, will likely increase economic activity.”

Westpac will pay a fully franked interim dividend of 61 cents a share, up from the 60 cents a year ago.

-AAP