Westpac Banking corporations’ impressive cash profit of AUD 3.8 billion for first half fiscal 2014 increased 8% on first half fiscal 2013 and exceeded consensus by 4%. The result was hard to fault and confirms our positive view on the bank’s ability to produce strong profits despite operational and economic challenges. Westpac benefited from improving revenue growth (up 5%) and a further sharp improvement in bad debts (down 22%) resulting in earnings per share up 7% and a 5% increase in fully franked dividends.

Improved asset quality, solid balance sheet growth and disciplined cost control again featured. Despite the strong profit and high quality result, no special dividend was declared but a special dividend is likely with the full year result later this year. Costs increased more than expected, up 6% on the first half of 2013. As expected net interest margins deteriorated compared with a year ago but are broadly in line with the second half of 2013.



Source - WBC

Solid lending growth (up 8% on March 2013) was spread across the Australian and New Zealand loan Portfolios. The most surprising outcome was Westpac’s peer leading credit quality with the 22% decline in bad debt expense to AUD 341 million. The very low bad debt impairment is just 0.15% of average loans outstanding. CBA is Westpac’s closest peer with bad debt to average loans of 0.16% in its latest half year, while ANZ Bank is at 0.22%.




WBC Daily Chart  (Source - Thomson Reuters)
 
Impairments at these historic lows are unsustainable and our medium term forecast of 20 basis points for Westpac is retained. Australian housing loans rose 5% despite increasing number of customers taking advantage of low interest rates and repaying home loans faster. The continued improvement in asset quality bodes well for future earnings. Earnings and dividends are likely to grow at about 7% per annum during our five year forecast period based on moderate credit growth, steady net interest margins, improving fee and commission income, and tight cost control. We gave the buy on WBC at $30.87 on 03/02/2014 (KIR – 102), we recommend a HOLD on the stock at the current price of $34.20.
 

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