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 Banking Corp (ASX: WBC) is the second-biggest lender of Australia and provider of various banking and financial services in Australia, New Zealand, Asia, the Pacific region, and internationally. The bank has five divisions in terms of its operations and these include Consumer Bank, BT Financial Group, Business Bank, Westpac Institutional Bank and Westpac New Zealand. The bank as of now is facing hurdles in relation to many financial enquiries while funding cost scenario looks mixed to manage the loan repricing. An improvement in deposit growth may help the banking sector overall. On the other hand, the Westpac Banking Corp is trying to manage its credit quality and funding position.

Agreed to pay the penalty for failing to comply with the National Consumer Credit Protection Act: Westpac Banking Corp (ASX: WBC) agreed to pay the penalty of $35 million, as per the agreement with the Australian Securities and Investments Commission (ASIC). The bank had failed to comply with the National Consumer Credit Protection Act (Cth) (the NCCP Act), which is related to certain responsible lending obligations and the bank has to settle the legal proceedings alleging breaches of consumer protection laws. This  settlement with ASIC, however is subject to Federal Court approval. Nonetheless, it has come into picture that the bank failed to gather appropriate customer data or has erroneously calculated the ability of the customers to repay loans, which related to about 100,000 home loans from year 2011 onwards to 2015. This happened due to approval by Westpac’s automated decisioning process. Of 260,000 loans approved by the bank over a three-and-a-half-year period, WBC had ignored living expenses for 50,000 and miscalculated another 50,000 borrowers' ability to repay their debts. ASIC had started the proceedings in March 2017 and had alleged about the problems reflecting how the bank had calculated the repayments on interest-only loans, and that it had relied on a benchmark to estimate customers' living costs rather than using expenses declared by the borrowers.

However, no allegation has been made by ASIC in terms of customers suffering any specific loss/damage at the back of the admissions made along with any finding of unsuitable loans offered to customers. Meanwhile, the move by ASIC demonstrates the scale of misconduct (relating to charging customers fees for no service, or irresponsible lending, and deceiving regulators, etc.) and required action needed across the financial sector. Previously, the inquiry, Royal Commission, had  generated criticism of regulators including ASIC. On the other hand, and early this year, WBC was understood to have the riskiest mortgage-book of the four banks, which dominate about 80% of Australian market. Further, the documents received by the Royal Commission showed an internal WBC report that had found nine out of 10 controls to ensure borrowers to give accurate financial information while these were ineffective. Thus, the banking group has been under pressure for quite some time now. Coming back to the latest penalty by ASIC, the amount is approximately double the previous record fine of $19 million handed out under the Act but is a small fraction of WBC's annual profits, projected to be about $8.4 billion this year. Therefore, the penalty is estimated to be something that the bank makes every business day of the year. Additionally, loans approved under the circumstances have performed similar to or even better than the rest of the home loan portfolio from a credit quality point of view. However, the bank has committed to proactively monitor the active loans (5400 of the loans in question were still active) and will provide required hardship assistance if need be. The bank’s June Quarter disclosures showed the strength of WBC’s mortgage book with 90+ day delinquencies in Australia at 0.72%. The stock market had otherwise reacted negatively to the news and the rise in mortgage rates, and thus WBC and other major banks’ stocks were down lately.


Australian mortgage portfolio (Source: Company Reports)

Net interest margin fell by 11 basis points in the Third Quarter of 2018: During the third (June) quarter 2018, WBC posted 11 basis points fall in the net interest margin to 2.06% compared to 2.17% in First Half 2018 (1H18). The 11bp decline is on the back of higher funding costs and a lower contribution from the Group’s Treasury. Higher funding costs arose due to the rise in short term wholesale funding costs as the bank bill swap rate (BBSW) rose sharply since February.  As per WBC, every 5bp movement in BBSW affects the Group’s margins by approximately 1bp. Compared to the first half of 2018, BBSW was on average 24bps higher in the third quarter of 2018. Accordingly, in 3Q18 this movement in BBSW reduced the Group’s net interest margin by 5bps. During the third quarter of 2018, the remaining 6bps margin fell due to 4bps from a reduced contribution from Group Treasury, majorly due to less opportunities in markets in the third quarter 2018 compared to first half of 2018 and 2bps from all other factors. These included the ongoing changes in the mix of the mortgage portfolio (less interest only lending) and due to lower rates on new mortgages. 

Well placed to meet APRA’s CET1 strong benchmark: WBC’s Common equity Tier 1 (CET1) capital ratio is of 10.4% as at 30 June 2018. This is down from 10.5% at 31 March 2018 as capital generated over the third quarter (including conversion of $566m of preference shares (CPS) to ordinary shares), is more than offset by the determination of the 1H18 dividend (net of the DRP). During the third quarter, the risk weighted assets (RWA) moved up modestly (0.4%), with credit RWAs being up $0.2bn and non-credit RWA being up $1.6bn. There is no material impact on RWA from regulatory model changes in the third quarter of 2018. The bank’s internationally comparable CET1 capital ratio is of 16.0% at 30 June 2018. 


CET1 Capital and RWA Movements  (Source: Company Reports)

Mix of Credit quality metrics during the third quarter 2018: During the third quarter of 2018, the credit quality metrics remained near cyclical lows. The level of impaired assets is stable with no new individual impaired loans over $10m in the third quarter. The stressed assets to total committed exposure declined by 1bp from 31 March 2018, to 1.08%.  Mortgage 90+ day delinquencies in Australia were up 3bps over the three months ended June 2018 and most States recorded some rise. Mortgage 30+ day delinquencies were flat over the third quarter 2018 and the properties in possession were lower at just 392.

Sound funding/liquidity position: WBC maintained strong liquidity position during the third quarter 2018 with net stable funding ratio (NSFR) at 112%, and liquidity coverage ratio (LCR) at 127%, which are well above regulatory minimums. The bank has issued $31bn term funding to end July 2018. The bank’s FY18 term funding is largely complete as for the 10 months to 31 July 2018, the bank had raised $31bn in term wholesale funding at an average duration of over 6 years. The mortgage growth is comfortably within the macro prudential boundaries. Moreover, in the third quarter, the flow of interest only lending (based on limits) was 24% (APRA requirement <30%). The interest only lending had represented 37% of portfolio in the third quarter of 2018, which is down from 40% at 31 March 2018.The investor lending growth, under APRA definition, is 3.7%, which is comfortably below 10% cap.

Regulatory developments and other updates: During the fourth quarter of 2018, the estimated impact of model changes from changes to operational risk model overlay and updates to mortgage PD3 models are expected to add approximately $11.5bn in RWA, and approximately 30bps reduction in CET1 ratio. Moreover, in the third quarter of 2018, WBC released new consultation from APRA on capital on the proposed changes to international comparability. The bank expects further updates from APRA on proposals to the capital framework later in 2018. AASB 9 will be applicable from 1 October 2018. Meanwhile, the securities of WBCHBB were suspended after the close of trading on 10 August 2018. These securities were to be reinstated to official quotation on 14 August 2018. Moreover, the Westpac Subordinated Notes II of WBC were suspended at the close of business on 10 August 2018, as per the Listing Rule 17.2, in expectation of their redemption on 22 August 2018.

Stock Recommendation and Analysis: Meanwhile, WBC has fallen 4.86% in one month as on September 07, 2018 and is trading at a reasonable P/E of 11.35x. This is due to fall of 11 basis point in the net interest margin during the third quarter. However, WBC had posted strong first half 2018 with the cash earnings growth of 6 per cent year on year to A$4.25bn ($3.2bn), beating the average market estimate for cash earnings of A$4.17. The group’s Price-to-Earnings (P/E) Ratio is in a decent zone indicating that the bank is trading at a low level in comparison to other majors. Its earnings retention has been improving from 0.15x as at March 2016 to 0.24x as at March 2018, while it is still below the industry median (0.62x). Its efficiency ratio, which measures the cost to the bank of each unit of revenue, has been maintained around 43% for the past few years while the industry median touches the figure of 54%; and as lower values are considered to be better, WBC seems to be in a decent spot despite many challenges at hand. Another parameter on valuation side indicates that the price to book ratio is around 1.5x, which is below the banking services’ level of about 2x. The lower P/B level indicates that the stock is found to be on an undervalued zone. From technical standpoint, the stock has respected its support price level of $27.6 while it saw resistance at the price level of $27.9. The stock now trades over its 52-week low level, and the Bollinger bands that define volatile environment indicate the upper level of around $30.7 and this sort of defies the otherwise thought overbought level of the stock. Moreover, the outlook for Australia is positive with GDP growth expected to move at decent level for the remainder of 2018 and 2019. Based on the foregoing, we give a “Buy” recommendation on the stock at the current price of $27.69.


 
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.