Westpac Banking Corporation

WBC Details

Westpac Banking Corporation (ASX: WBC) is Australia’s first bank and oldest company. WBC is amongst the four major banking organisations in Australia and one of the largest banks in New Zealand. WBC is engaged in delivering an array of consumer, business and institutional banking and wealth management services through a portfolio of financial services brands and businesses. WBC has branches, as well as affiliates and controlled entities across Australia, New Zealand, Asia, and the Pacific region.

Result Performance for FY21 (For the Year Ended 30 September 2021)

• WBC has recorded a net profit attributable to the owners of $5,458 million, up by 138% YoY driven by lower notable items and from released impairment provisions raised in 2020.
• Net interest income remained lower, down by 2% on a cash basis, with net interest margins decreased by 4 basis points owing to the impact of historically low-interest rates and strong competition, mainly in mortgages.
• Asset quality has improved over the year with stressed assets as a percentage of total committed exposures falling to 1.36% from 1.91%.

Exhibit 1: Performance Trend

Source: Analysis by Kalkine Group

Maintained a Robust Capital Position

The benefit from higher earnings along with underwriting 2020 final dividend and the exit of non-core businesses have further strengthened the group’s capital base. WBC ended FY21 with a Common Equity Tier One capital ratio of 12.3%, up by 119 bps, and was well above the APRA’s unquestionably strong benchmark of 10.5%.

WBC continues to maintain a strong balance sheet driven by sustained improvement in credit quality as well as a healthy capital position with a CET1 capital ratio of 12.3% and deposit to loan ratio at 82%. The credit quality has improved as stressed exposure continues to decline from the last year’s peak, and the mortgage 90+ day delinquencies were also meaningfully lower.

Announced $3.5 billion Off-Market Share Buy-Back

WBC, on 1 November 2021, has announced its intention to undertake an off-market buy-back of up to $3.5 billion worth of Westpac ordinary share. The buy-back started on 17 November 2021 and will be closed on 17 December 2021. For buy-back, the board has considered the improved operating performance and positive progress on its strategic priorities mainly the completion of various divestments that have resulted in a strong capital position.

Key Metrics

WBC’s net interest margin improved to 2.06% in FY21 from 2.03% in FY20. Its efficiency ratio reduced to 63.1% in FY21 from 75.2% in FY20.

Exhibit 2: Key Financial Metrics

Source: Analysis by Kalkine Group

Top 10 Shareholders: The top 10 shareholders together form 13.98% of the total shareholding while the top four constitute the maximum holding. Notably, The Vanguard Group, Inc. and BlackRock Institutional Trust Company, N.A. are holding a maximum stake in the company at 5.44% and 2.93%, respectively, as also highlighted in the chart below.

Exhibit 3: Top 10 Shareholders

Source: Analysis by Kalkine Group

Key Risks

The group is exposed to competitive risk as banking throughout Australia and New Zealand remained highly competitive across price, engagement, and innovation. Further, the impact of low-interest rates will continue to weigh on banks and put pressure on net interest margins. Further, it is susceptible to the risk of changes in laws and regulatory requirements.

Outlook

WBC expects the lending demand to be sound as the economy rebounds. However, the net interest margins will remain under pressure due to the impact of low-interest rates and competition. The expenses are expected to remain lower due to the effect of simplifying its business and progress towards its $8 billion cost target by 2024. WBC also remains hopeful that the asset sales will aid in boosting its capital position, however, this will result in lower earnings. WBC is also eyeing at growing lending broadly in line with its major bank peers in FY22 by leveraging the impetus generate over the last year. The strong capital position along with surplus franking credits and the potential for further asset sales provides the flexibility for the Board in its ongoing considerations on capital management.

Valuation Methodology: Price/BVPS Based Relative Valuation (Illustrative)

Technical Overview:

Chart:

Source: REFINITIV

Note: Purple Color Line Reflects RSI (14-Period)

Stock Information                                           

WBC has delivered 9-month and one-year returns of ~-9.35% and ~+6.60%, respectively. The stock is trading lower than the average of the 52-week high price of $27.12 and the 52-week low price of $19.23, which indicates a good opportunity for accumulation.

The stock has been valued using a Price/BVPS multiple-based illustrative relative valuation and the target price so arrived reflects a rise of low double-digit (in % terms). A slight premium has been applied to Price/BVPS Multiple (NTM) (Peer Average), considering its strong capital position as well as significant growth in earnings in FY21.

Considering the aforementioned factors, we give a “Buy” recommendation on the stock at the current market price of $21.78 per share (Time: 3:00 PM (GMT +10), Sydney, Australia) on 24^th November 2021.

Note 1: The reference data in this report has been partly sourced from REFINITIV.

Note 2: Investment decisions should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the analysis has been achieved and subject to the factors discussed above alongside support levels provided.

Technical Indicators Defined:-

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices

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