COMPANY NEWS & UPDATES
Westpac Banking Corporation ( WBC )
Accumulate Valuation $ 29.00
Earnings Forecast
Yr to Sept |
2021A |
2022F |
2023F |
|
Net Revenue
($ M )
|
20,304 |
21,507 |
23,250 |
|
Reported
Profit ($ M )
|
5,352.0 5,007.8 |
6,611.8 |
EPS ( c ) |
146.3 |
143.4 |
188.8 |
Div ( c ) |
118.0 |
120.0 |
125.0 |
P / E ( x ) |
15.9 |
16.7 |
12.7 |
Yield (%) |
5.1 |
5.0 |
5.2 |
Franking (%) |
100.0 |
100.0 |
100.0 |
|
EPS Growth
(%)
|
101.7 |
-2.0 |
31.7 |
* Profit & EPS adjusted for options , goodwill , notional earnings and nonrecurring items .
Rising Interest Rate Environment
Australian bank shares prices have outperformed the broader market year to-date . We think due to increasing expectations , the RBA is going to lift the cash rate from 0.1 % lows . The Australian three-year bond yield now around 2.4 %, compared with below 1 % in January 2022 .
We had already factored in a higher cash rate forecast over the medium term , but on review have made some small upward revisions to our forecasts , but none meaningful enough to move our valuations .
On current forward metrics , the banks still look reasonably attractive given the earnings outlook , with FY22 dividend yields averaging 4.5 % and P / E averaging 18 times . There is a significant dispersion between the bank that has operationally done well in recent years , namely , Commonwealth Bank , and those that have had some mishaps , namely , Westpac and ANZ .
Our current forecasts imply a cash rate of about 2 % by FY26 and bank NIM up around 25 basis points from FY22 lows . We see considerable scope for major banks to reprice loans upward to improve margins , given the significant cost and switching cost advantages the four major banks enjoy over smaller competitors . Our forecasts assume net interest income for the Australian major banks increases between 25 % to 35 % from FY21 levels . With strong capital positions and dividend payout ratios reset , dividend growth is likely to be similarly strong .
Banks with more funding from customer deposits , and transaction and saving accounts particularly , should be the biggest beneficiaries , with Commonwealth Bank and Westpac the standouts .
Westpac comfortably meets APRA ' s common equity Tier 1 ratio benchmark of 10.25 %. The bank ' s common equity Tier 1 ratio was 12.2 % as at Dec . 31 , 2021 .
We see the risk of higher loan losses and credit stress inflating riskweighted assets as the greatest threat to the bank ' s capital position in the near term . In the past three years , the proportion of customer deposits to total funding is about 60 % to 65 %, reducing exposure to volatile funding markets .
Our valuation for Westpac is $ 29.00 per share . Our valuation incorporates moderate loan growth , net interest margins to gradually recover after being squeezed over the short term , tight cost control , and a relatively benign outlook for bad debts over the medium term . We forecast return on equity return to mid-cycle levels above 10 % by FY24 .
We expect Westpac to grow group loans at 4 % per year , shadowing our expectation for the banking system . Net interest margins average of 2.00 %, with pressure over the shortterm subsiding as competition for deposits eases , conversion from interest only to principal and interest slows , and cash rates begin to normalise .
A large penalty due to breaches of anti-money-laundering laws of $ 1.3 billion and a spike in loan losses in FY20 , resulted in a large fall in earnings per share , but we assume a non-recurrence of such hefty penalties and customer remediation costs to support a material recovery in EPS . We expect the bad-debt expense as a proportion of average gross loans to stabilise around 0.17 % from FY25 , down from an increase to 0.45 % FY20 .
We expect cost-efficiency to underpin profit growth , with cost / income ratio falling from 63 % in FY20 to around 45 % by FY25 .
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