Investors will be looking to see whether bad debts at Westpac Banking Corporation have peaked when Australia’s second biggest lender reports earnings this week.

Westpac, the last of Australia’s banks to report its fiscal 2009 earnings, said in August that bad debts had risen in the third quarter, while it had increased its watchlist for borrowers who might have trouble with repayments.

CLSA banking analyst Brian Johnson says market observers will be looking for an update on bad and doubtful debts when the bank reports on Wednesday.

“Westpac had given us very strong guidance at the third quarter, and what we noticed there was a sharp escalation in their watchlist and substandard loans,” Mr Johnson said.

“The most important point will be their indication of future asset quality, the sustainability of their treasury revenues and the strength of their capital ratio.”

Westpac’s impairments for the three months to June 30 increased to $865 million, taking the nine-month figure to about $2.5 billion.

The other three major banks recently reported full-year figures between $2.9 billion and $3.8 billion.

By August, stressed exposures at Sydney-based Westpac had risen to 2.8 per cent of total committed lending from 2.1 per cent at the end March.

And Westpac chief executive Gail Kelly was unwilling to say in August when bad debts would peak.

Last week, National Australia Bank Ltd (NAB) and ANZ Banking Group Ltd both reported that bad debts surged to over $3 billion for the full year to September.

NAB chief executive Cameron Clyne said the peak of the debt cycle would be unknown for another five months.

In contrast, ANZ chief Mike Smith said bad debts were likely to decline in the fiscal 2010 second half.

The country’s biggest lender, Commonwealth Bank of Australia, reports on a financial year basis, and is due to report a first quarter update on Monday, November 9.

Its impairment expenses were $2.9 billion for the year to June.

Westpac’s capital levels, a key indicator of a bank’s strength, particularly during the downturn, will be another focal point for investors, especially after the bank’s court loss in New Zealand that could cost it $NZ918 million ($A732.09 million).

If the bank increased tax provisioning by that amount, it would be equivalent to a 25 basis point reduction in its Tier 1 capital ratio to 7.95 per cent, from 8.2 per cent as of June 30, all else being equal.

Westpac is expected to increase full-year profit, partly as it benefits from the takeover of St George, completed in December 2008.

The bank is expected to report that cash earnings will rise to $4.45 billion for the 12 months to September 30, from $3.73 billion the previous year, according to Reuters data based on analysts estimates.

At the first half result, Westpac gave pro-forma figures, which added figures from St George for the whole six month period and compared the result to the combined Westpac-St George numbers from the year before.

On that basis, Westpac’s full-year profit may decline.

Banks prefer to focus on the cash earnings figure because it takes out fluctuations based on unrealised losses on asset values.

Shares in Westpac fell 78 cents, or 2.96 per cent, to close at $25.59.

AAP