COMPANY NEWS & UPDATES
Westpac Banking Corporation ( WBC )
Accumulate Valuation $ 25.00
Earnings Forecast
|
Yr to
September
|
2020A |
2021F |
2022F |
|
Sales Revenue
($ M )
|
20,626 |
19,156 |
19,585 |
|
Reported
Profit ($ M )
|
2,608.0 4,444.2 |
4,429.9 |
EPS ( c ) |
72.5 |
121.3 |
147.8 |
Div ( c ) |
3.0 |
61.0 |
103.0 |
P / E ( x ) |
28.7 |
15.4 |
12.6 |
Yield (%) |
1.5 |
3.3 |
5.5 |
Franking (%) |
100 |
100 |
100 |
|
EPS Growth
(%)
|
-63.4 |
67.1 |
21.8 |
* Profit & EPS adjusted for options , goodwill , notional earnings and noni it
2020 Full Year Result
Westpac ' s FY20 cash profit is disappointing , but in line with our $ 2.6 billion forecast . The 62 % drop in profit was heavily impacted by a $ 2 billion increase to loan loss provisions and notable items of $ 2.6 billion , which had been announced . We expect earnings to spring back in FY21 with non-repeat of large oneoff items and loan impairment expenses falling from 0.45 % of loans to around 0.35 %. There are Westpac specific issues such as poor home loan growth and rising operating costs , but we expect management to resolve both . Housing loans fell 1.4 % in 2020 as approval times fell below the industry standard . Operating costs increased 6 %, with rising risk and compliance costs a key driver . Net interest margins , or NIMs , were down 12 basis points to 2.08 % in FY20 . NIM in the fourth quarter fell to 2.02 %.
We maintain our valuation of $ 25 per share . We expect margins will fall to 1.9 % by FY22 and rise back to 2 % in 2025 as rates begin to lift from almost zero . We believe the bank will successfully bring the cost base down by FY23 , however , the cost / income ratio will still be 50 % compared with 42 % in FY17 . Westpac ' s funding and operating scale advantages should see it win its fair share of loans , and we believe investment in the lending process and the front-end user experience will see a return to credit growth in line with the market at 3 % per year from second-half FY22 .
The bank ' s final dividend of 31 cents per share was almost 30 % better than our 24 cents forecast . As we expected , the dividend will be neutralised by a fully underwritten DRP , effectively a $ 1.1 billion equity raising . With loan deferrals now down to 4 % of mortgage balances and 2 % of business loans , common equity Tier 1 at 11.1 %, and a loan loss provision balance of $ 6 billion , we believe the bank is well positioned for rising loan losses .
We are somewhat disappointed by the operating costs result , particularly the outlook . Costs before notable items increased 6 % to $ 10.2 billion . Costs associated with changing the risk and compliance culture , and making enhancements to systems and processes will be with the bank for longer than we first thought . We estimate a slightly higher cost base in FY21 at $ 10.4 billion , falling to $ 10 billion by FY23 . This is up from our previous forecast of $ 9.6 billion . Costs associated with implementing projects to handle remediation , complaints , and monitor anti-moneylaundering should still fall , as will the increased headcount to handle COVID-19-related customer assistance , but management commentary suggests a large part of recent costs are permanent . Increased digital transactions and employees splitting time between the office and home , leave opportunities for lower branch and office costs . Management will provide an update on its plans to " reset " the cost base at its interim result .
Lower interest rates are not good for savers , and it is not good for bank earnings . With the RBA trimming rates again , NIM pressure will not abate in the medium-term . Given this , it is imperative the bank fix its performance in the mortgage market . We understand Westpac ' s processing issues in adopting changes to lending standards blew out approval times , and while there has been some improvement , it is expected to have a drag on first-half fFY21 loan growth . ANZ ' s recent result shows that once mortgage brokers have confidence in turnaround times and consistency in the application of credit standards , the loan applications will return . Westpac being overweight the investor market ( 37 % of balances and 30 % of second half FY20 loans ) has been to the bank ' s detriment . Not only has demand for new loans cooled , but investors are paying down debt faster with increased uncertainty of the outlook , being unable to travel , and interest costs falling materially . We expect Westpac ' s loan book to be flat in FY21 , before returning to 3 % growth from FY22 .
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