Company Overview: Westpac Banking Corporation is a banking organization. The Company provides a range of banking and financial services in markets, including consumer, business and institutional banking and wealth management services. The Company is engaged in the provision of financial services, including lending, deposit taking, payments services, investment portfolio management and advice, superannuation and funds management, insurance services, leasing finance, general finance, interest rate risk management and foreign exchange services. The Company's segments include Consumer Bank, Business Bank, BT Financial Group (BTFG), Westpac Institutional Bank (WIB) and Westpac New Zealand. The Company has branches throughout Australia, New Zealand, Asia and in the Pacific region. The Company through its division offers its services under various brands, such as Westpac, St.George, BankSA, Bank of Melbourne and RAMS brands.


WBC Details

Strong First Half 2018 Financial Performance: Westpac Banking Corp (ASX: WBC) is one of the four major banking organizations in Australia and one of the largest banks in New Zealand. In the first half of 2018, WBC’s earnings came above expectations of the market driven by growth at the Australian lender’s consumer and corporate divisions, that helped offset expenses including costs associated with a wide-ranging government inquiry into the country’s banking sector due to Royal Commission. The cash earnings, which is the preferred measure for Australian banks, grew 6 per cent year on year to A$4.25bn ($3.2bn) for the first half of 2018, beating the average estimate for cash earnings of A$4.17 from various analysts. During the first half 2018, net profit attributable to owners of Westpac Banking Corporation was up 7% to $4,198 million compared to first half 2017. Further, during the first half, there was a 4% increase in net operating income before operating expenses and impairment charges, 2% rise in operating expenses and a 20% decrease in impairment charges. The net interest income rose 9% compared to first Half 2017. There is total loan growth of 5%, primarily from Australian housing which grew 6%. The reported net interest margin expanded 11 basis points to 2.16%, due to higher spreads on certain mortgage types (including investor lending and loans with an interest-only feature), and increased deposit spreads. However, these were partly offset by the Bank Levy that was effective from July 2017. Moreover, during the first half there was a fall of 9% in the non-interest income compared to first half 2017 primarily due to a decrease in trading income of $226 million and the impact of economic hedges on New Zealand earnings ($63 million lower). The bank registered 2% rise in operating expenses compared to First Half 2017. The increase in operating expenses includes increase in annual salary and higher technology expenses related to the Group’s investment program and a rise in regulatory and compliance costs, including costs associated with the Royal Commission. However, these increases were partly offset by productivity benefits and lower amortisation of intangibles. The effective tax rate of 30.4% was lower than the First Half 2017 effective tax rate of 30.7%. The Group’s Return on average Ordinary Equity (ROE) for the half 2018 was 13.8%, up from 13.7% in Second Half 2017 and 13.6% compared to the prior corresponding period.


1H 18 Financial Performance (Source: Company Reports)

Strong Asset & Credit Quality: WBC continues to have a sound asset quality. In the first half 2018, WBC posted CET1 capital ratio of 10.5%, which is in line with APRA’s ‘unquestionably strong’ benchmark. The liquidity ratios were well above regulatory minimums of 100%. Moreover, WBC also has sound credit quality and the key metrics is less changed compared to the prior half. Stressed assets to TCE were 1.09% at 31 March 2018, which is a rise of 4 basis points from September 2017 but down 5 basis points compared to March 2017. The impaired assets were little changed over the half with no new facilities greater than $50 million becoming impaired. Further, during the first half 2018, the total provisions were little changed over the half (up $46 million) mostly in collectively assessed provisions. Therefore, the Group’s provision coverage was steady. The ratio of gross impaired asset provisions to gross impaired assets is of 46% (down 76 basis points on the prior half) while the ratio of collectively assessed provisions to credit risk weighted assets was little changed over the half, down one basis point to 0.75%.

Credit quality (Source: Company Reports)

Strong Balance Sheet: WBC has maintained strong balance sheet with a decent CET1 capital ratio, which is in line with the “unquestionably strong” benchmark set by APRA. The ratio has changed little over the half due to organic capital generation which was largely offset by regulatory model changes. Moreover, during the first half, WBC has posted a liquidity coverage ratio (LCR) of 134% which is above the 100% regulatory minimum and during the first half the net stable funding ratio (NSFR) was 112% and was above the 100% regulatory minimum which applied from 1 January 2018.

Capital Management: WBC had raised approximately $1.69 billion from the Offer of Westpac Capital Notes 5 and had issued approximately 16.9 million Notes at $100 each. Meanwhile, WBC has announced that it will redeem all of its Westpac Subordinated Notes II, which represents 9,252,850 Notes at $100 each on their first optional redemption date of 22 August 2018, as per the Note Conditions. The bank will pay each holder of Westpac Subordinated Notes II the face value of $100 and a final interest payment of $1.07002 for each Note held on 14 August 2018 (the record date for final payments) on 22 August 2018. However, both the payments are subject to the Note Conditions. The last day of trading in Notes on the Australian Securities Exchange (ASX) is expected to be 10 August 2018. WBC had raised approximately $925 million of Tier 2 Capital in August 2013 through the issue of 9,252,850 Westpac Subordinated Notes II. Meanwhile, WBC had determined an interim ordinary dividend of 94 cents per share, which is 100% fully franked, unchanged over both Second Half 2017 and First Half 2017.

Targeted Growth: WBC has planned to grow value by targeting a small number of higher growth segments over the medium term. Wealth and SME are the major areas of focus of the bank. In Wealth, WBC’s franchise and investment is leading to funds management and administration flows along with growth in insurance premiums. However, these were partially offset due to a cautious approach from consumers and significant regulatory uncertainty. Further, funds margins are lower and insurance claims were higher during the first half. Additionally, during First Half 2018, WBC’s built its digital SME capability, has led to a 2% rise in SME lending over the half. The bank improved the functionality of its Panorama wealth management platform, with a particular focus on the mobile application and client reporting and it grew Australian Life insurance in-force premiums by 19%, as the division began managing Group Insurance for BTFG Corporate Super.

Steps Taken to Restore Reputation: In the first half 2018, there was intense scrutiny including from the Royal Commission into Financial Services. WBC in order to restore the Group’s reputation implemented a number of programs to improve trust. WBC has completed the implementation of the Australian Banking Association’s “Six point plan” and now the bank is waiting for finalisation of the industry Code of Banking Practice to complete implementation. In 2017, WBC had commenced the program to reduce complexity and resolve prior issues which have the potential to impact customers and the Group’s reputation. These reviews had identified some previous instances where the bank did not meet industry or community standards and now WBC is taking action to put things right so that customers do not face the disadvantage from past practices. Over the last 12 months, WBC is progressing-- the review of products to reassess their features and how the Group had engaged with customers. The bank as part of these reviews, made 150 changes including more than halving the number of consumer products on offer, had cut the transaction fees for 1.3 million customers, removed ATM fees, and introduced a new low rate credit card and the bank continues remediation of previous issues, paying out $39 million to customers from the 2017 provision for customer refunds and payments. The group also got Anita Fung to the Westpac Board recently.


Growth and Return Scenario (Source: Company Reports)

Banking Sector Scenario: In the first half of 2018, the economic environment was positive for the banking sector as Australian system credit grew approximately 5% compared to the prior corresponding period, and there was continued positive fund flows, and there was a low level of stressed assets. The credit growth has softened a little during the last six months driven by macro prudential rules that had contributed to a slowing in the housing market and businesses in aggregate remained cautious on new investment. There was intense competition from both local and international financial institutions. WBC had managed the business during the period in a balanced way across strength, return, productivity and growth. In the first half 2018, the group had prioritised return over growth. However, the financial services environment is impacted by the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry. This was first established in mid-December 2017, and the Federal Government had established a Royal Commission to check into Misconduct in the Banking, Superannuation and Financial Services Industry. Now the Royal Commission has completed the public hearings on consumer lending and financial advice. The Royal Commission had raised serious questions about customer treatment and outcomes, responsiveness to complaints, incentive structures, conflicts of interest and regulatory oversight.

Stock Recommendation: Meanwhile, WBC stock has fallen 1.57% in three months as on August 03, 2018 but is trading at a reasonable P/E of 11.8x. WBC’s performance in the first half 2018 was strong with strong asset and credit growth. The bank continues to maintain strong balance sheet and is taking steps to restore reputation due to scrutiny from Royal Commission. Based on the foregoing, we give a “Buy” recommendation on the stock at the current price of $ 29.15.
 

WBC Daily Chart (Source: Thomson Reuters)

Disclaimer

The advice given by Kalkine Pty Ltd and provided on this website is general information only and it does not take into account your investment objectives, financial situation or needs. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people. Kalkine.com.au and associated pages are published by Kalkine Pty Ltd ABN 34 154 808 312 (Australian Financial Services License Number 425376). The information on this website has been prepared from a wide variety of sources, which Kalkine Pty Ltd, to the best of its knowledge and belief, considers accurate. You should make your own enquiries about any investments and we strongly suggest you seek advice before acting upon any recommendation. Kalkine Pty Ltd has made every effort to ensure the reliability of information contained in its newsletters and websites. All information represents our views at the date of publication and may change without notice. To the extent permitted by law, Kalkine Pty Ltd excludes all liability for any loss or damage arising from the use of this website and any information published (including any indirect or consequential loss, any data loss or data corruption). If the law prohibits this exclusion, Kalkine Pty Ltd hereby limits its liability, to the extent permitted by law to the resupply of services. There may be a product disclosure statement or other offer document for the securities and financial products we write about in Kalkine Reports. You should obtain a copy of the product disclosure statement or offer document before making any decision about whether to acquire the security or product. The link to our Terms & Conditions has been provided please go through them and also have a read of the Financial Services Guide. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine Pty Ltd do not hold positions in any of the stocks covered on the website. These stocks can change any time and readers of the reports should not consider these stocks as advice or recommendations.