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

Westpac is Australia's first financial entity to start a service revolution and is the first bank and oldest amongst the big four major banking organisations in Australia. Further, it is one of the largest banks in New Zealand. WBC has strong financial performing among its peers. The Group has a versatile portfolio and provides a broad range of consumer, business and institutional banking and wealth management services through a portfolio of financial services brands and businesses. It has been supporting Australians for over 200 years. Over 70 per cent of its customers are ahead on their home loan repayments. It has come out with a new product that is Presto Smart which is a new integrated payment solution, designed to make in-store payments easy by directly connecting a range of point of sale (POS) systems to one’s payment terminal. Its trade facilities offer competitive interest rates and are available in most major currencies. Since last three years, WBC has reviewed more than 300 products and has made over 150 changes to its products, policies, and business practices, including introducing a low rate credit card, removing sales incentives for tellers, and providing an independent advocate for its customers. While the group faces some challenges owing to credit growth and regulatory changes, the market position and banking franchise exposure and dividend yield now indicate a compelling reason for an entry opportunity given the stock price.


Mortgage Portfolio (Source: Company Reports)

Decent Financial Performance - Westpac reported a profit of $4,198 million (an increase of 7 per cent as compared to 1HFY17) for 1HFY18 (ended March 2018). The Group preferred cash earnings as its preferred measure of earnings were up by 6 per cent, with a sound growth in revenue and reduction of 20 per cent in loan impairment charges. Its customer franchisee continues to grow and is making banking more easy and efficient. The Group declared a dividend of 94 cents, per ordinary share, fully franked and represents a pay out of 75 per cent with a dividend yield of 6.4 per cent. WBC’s operating expenses including costs associated with the Royal Commission rose 1 per cent as compared to the second half last year, and its cost to income ratio fell to 41.7 per cent.


Trend of CET1 capital Ratio (Source: Company Reports)

This increase in ongoing expenses in the half was more than offset by productivity savings of $131 million. Westpac will have to pay $186 million pre-tax for the six months which has been levied by the Federal Government bank and will be paid out of retained earnings and is equivalent to 4 cents per share.  It has delivered a CET-1 ratio of 10.5 per cent which is in line with APRA’s ‘unquestionably strong’ benchmark. It moved from 8.7 in March 2017 to 10.5 in March 2018. In fact, Liquidity ratios are well above the regulatory minimums of 100 per cent like Liquidity coverage ratio was 134 per cent and Net stable funding ratio was 112 per cent as on 31 March 2018. Net interest margin for 1HFY18 was up by 7bps from prior period. The Net interest income increased $665 million or 9 per cent as compared to 1HFY17 while asset quality remained sound, with stressed exposures as a percentage of total committed exposures at 1.09 per cent, down 5 basis points as compared to 1HFY17.


Growth in Dividend (Source: Company Reports)

Other Key Updates: The group also updated the market on the following:

1 ) Westpac recently issued 7,250 Series 2018-5 Notes (due in June 2028 with A$725,000,000 of the Aggregate Principal Amount of Tranche). It issued for a consideration of A$100,000 fully paid per Series 2018-5 Note and its net proceeds will be used for Westpac's general funding purposes. These Notes will satisfy the requirements of the Australian Prudential Regulation Authority to qualify as Tier 2 Capital of Westpac. Further, the net proceeds are expected to increase Westpac’s total capital ratio on a Level 2 basis by less than 0.2 per cent.

2) The Group recently has announced fully franked dividend payment of AUD 0.9274 with distribution base of 2.0561 per cent per annum for WB sub notes (WBCPD - CAP NOTE 3-BBSW+3.20 PER CENT PERP NON-CUM RED T-03-19). It will be paid on September 10, 2018 with the record date of August 31, 2018.

Net Interest Margin Movement (Source: Company Reports)
 

3) Besides this, the Group informed the market that Alexandra Holcomb will retire from his role as Company’s Chief Risk Officer on June 25, 2018 and that David Stephen will join the Board in the coming months.

4) The Company released its Supplementary Product Disclosure Statement and supplemented the Westpac Vanilla Instalment Equity Warrants (Westpac VIEWs). Westpac VIEWs are leveraged ASX-listed financial products that give one an interest in ASX-listed securities without the requirement to pay the full price for the security upfront. It provides the details of the individual Series of Westpac VIEWs and released details of the new Series of Westpac VIEWs like Telstra Corporation Limited (ASX: TLS) and iShares Core (ASX: IOZ).

5) Westpac announced the distribution of $0.200 per security for SFI (Self-Funding Instalments) as mentioned in PDS (Product Disclosure Statement) that dividends will be applied to reduce the Completion Payment of the SFIs and will be paid on or about 2 July 2018.


Cash Earnings Movement (Source: Company Reports)

BT Financial Advice announced the removal of grandfathered payments- BT Financial Advice customers that are operating through the Westpac, St. George, Bank of Melbourne and BankSA networks (BT Financial Advisers) will be benefited from the removal of grandfathered payments attributable to their BT products. The Group is working towards the changes taking effect from 1 October 2018 to allow sufficient time for implementation across more than 12 different IT systems, two platforms and many products. BT decided that it will honouring its contractual obligations to external financial advisers who are currently receiving grandfathered payments in respect of a BT financial product.


Ratio of Stressed Assets to Total Committed Exposures (Source: Company Reports)

Positive Outlook - As Australian economy is improving, GDP is expected to be near trend at around 2.7 per cent for the remainder of 2018 and 2019. Household income growth remains lacklustre and inflation is low, so it is expected that The Reserve Bank is likely to keep rates on hold for some time. For Australian economy, momentum will weigh on commodity prices. The growing middle class and the rebalancing of the Chinese economy towards consumption will continue to boost Australian service exports, particularly in tourism and education. WBC’s strength of its brands and quality of its people means that it is well positioned to support growth across regions and industries. It is consistently increasing the value that it delivers to its customers and shareholders over the long-term. As the housing market is expected to continue to cool so this means that opportunities are opening up for first home buyers, who are beginning to step up in place of investors. The bank expects cost growth for FY18 to be in the range of 2-3 per cent (excluding the Hastings impact).

Stock Performance- The Company’s vision is to be one of the world’s great service companies, that can help its customers, communities and people to prosper and grow. As on date, it is Australia’s second largest company, with almost 40,000 people around the world and is devoted to helping more than 13 million customers to grow and prosper. Further, the management stated that they maintained the credit ratings of AA- from Fitch Ratings and A1 from Moody’s and AA- from S&P Global Ratings. WBC disclosed to ASX that one of its directors, Peter Stanley Nash had a direct & indirect interest in the company and acquired 2,876 more ordinary shares via on-market Purchase at an issue price of $27.52 per share. It is expected that system lending growth will further moderate and is targeting similar productivity savings as it witnessed in 1HFY18.

According to the management, the concerns raised by Royal Commission are important and provide a critical opportunity to restore customer trust across the sector. In this regard, WBC has launched number of new digital initiatives that make it easier for customers to manage their money. The Group is actively seeking out instances where it has gone wrong, and in those cases, it is putting it right so that the customers are not affected. There was an improvement in Reinvestment Rate that is it moved up from 1.5 per cent (as on September 2017) to 1.6 per cent (as on March 2018). The stock was down by 6.07 per cent in past six months and recovered in last one month and was up by 3.34 per cent as on 22 June 2018. The stock moved up 4.4% in last five days. We give a “Buy” recommendation on WBC at the current market price of $29.20 keeping in mind the interest rates landscape and WBC’s credit portfolio which is fundamentally looking better and well positioned.
 

WBC Daily Chart (Source: Thomson Reuters)

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