COMPANY NEWS & UPDATES
Westpac Banking Corporation ( WBC )
Hold Valuation $ 29.00
Earnings Forecast
Yr to Sept |
2020A |
2021F |
2022F |
|
Net Revenue
($ M )
|
20,626 |
20,891 |
20,759 |
|
Reported
Profit ($ M )
|
2,608.0 6,015.1 |
5,954.0 |
EPS ( c ) |
72.5 |
164.1 |
162.0 |
Div ( c ) |
31.0 |
105.0 |
110.0 |
P / E ( x ) |
28.7 |
15.6 |
15.8 |
Yield (%) |
1.5 |
4.1 |
4.3 |
Franking (%) |
100 |
100 |
100 |
|
EPS Growth
(%)
|
-63.4 |
126.2 |
-1.3 |
* Profit & EPS adjusted for options , goodwill , notional earnings and nonrecurring items .
2021 Interim Result
Westpac ' s first-half FY21 result was solid , with cash profit of $ 3.5 billion up 256 % on first half 2020 and 119 % on second-half 2020 . The most interesting news is management ' s aggressive target to bring costs down by approximately 15 %, or $ 1.5 billion , to $ 8 billion by FY24 . The reductions exclude costs from businesses earmarked for divestment . We think there is a high chance the bank falls short on its target given changes could begin to impact customer and employee satisfaction , and see the bank lose market share . In addition , there could also be unforeseen costs around risk and compliance , regulatory change , or competitive disruptions . We have lowered our long-term operating cost forecasts by 5 %, which implies an underlying cost base of $ 9.5 billion by FY24 . We increase our valuation by 7.5 % to $ 29 after factoring in a portion of the planned lower costs and the time value of money .
Our FY21 profit forecast increases 7 % due to lower loan impairment expenses . The bank has already begun to release some of the loanloss provisions taken last year , with an impairment reversal benefit of $ 372 million in the half . We forecast a loan impairment expense of just $ 252 million or 0.04 % of loans in FY21 .
The net interest margin , or NIM , of 2.07 % was up 4 basis points on second half FY20 . The bank continues to benefit from low-cost deposit funding , but opportunities to reprice are diminishing . We forecast NIM to bottom at 1.9 % in FY23 but recovers to around 2.05 % by FY25 as the cash rate rises .
Despite the stronger earnings , we cut our full year dividend forecast by 9 % to $ 1.05 assuming a lower payout ratio . The fully franked interim dividend of 58 cents per share is up from the final dividend of 31 cents paid in FY20 .
We expected the bank ' s return on equity to improve from a low of 3.8 % in 2020 , given largely cyclical and non-recurring dented returns . But the economic rebound has pushed ROE above 10 % quicker than we thought . FY20 profit was ravaged by $ 2 billion in loan loss provisions and over $ 2 billion in penalties , writedowns and remediation costs .
The interim dividend implies a 60 % payout ratio and is within management ' s new target range of 60 % to 65 %. We have lowered dividend forecasts to be within 65 % and 70 % over the next five years , with our view of credit growth likely not as positive as management ' s . The good news is we do not believe management is maintaining capital to make risky investments or shift the bank ' s risk appetite . Management reasonably seeks to ensure the bank can fund annual investment spend and hold enough capital to grow its loan book . So if loan growth doesn ' t eventuate , the additional retained earnings would be returned to shareholders eventually .
Common equity Tier 1 ratio of 12.3 % implies $ 6 billion in capital above regulatory requirements . We thought the bank could afford to pay a higher payout ratio and simply eat into this capital buffer if necessary . Based on our FY21 earnings forecasts a 75 % payout ratio as opposed to 65 % would lift the dividend by 16.5 cents per share . At a common equity Tier 1 ratio of 10.5 % the bank has the equivalent of $ 1.70 per share in excess capital , hence capital management initiatives such as a buy-back or special dividend should more than offset any investor dissatisfaction with the lower payout target .
Operating expenses excluding notable items were flat at $ 5.2 billion in first half FY21 . Management guided to slightly higher costs in the second half , with costs expected to begin falling from FY22 . We like management ' s ambitious cost target , but we do not think it will be the primary focus of the group . The cost savings in many ways go hand in hand with improved user experience . Simplifying and streamlining products should also reduce the risk of costly remediation programs .
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