Westpac Banking Corporation

WBC Details

Sale of Pacific Businesses: Westpac Banking Corporation (ASX: WBC) provides banking, financial and related services. The market capitalisation of the bank stood at ~$74.39 billion as on 11^th January 2021. On 23^rd December 2020, WBC notified the market with the update on AUSTRAC proceedings, which commenced on 20^th November 2019. The company stated that ASIC has completed the investigation and has decided not to take any enforcement action against the bank or any individuals in connection with the investigation. In order to focus on the consumer, business and institutional banking in Australia and New Zealand, WBC announced the sales of its Pacific businesses, Westpac Fiji and its 89.91% interest in Westpac Bank PNG Limited to Kina Securities Limited for consideration of up to $420 million on 7^th December 2020.

Financial Highlights: During FY20, the bank witnessed a fall of 66% in statutory net profit to $2,290 million, mainly because of higher impairment charges, increased notable items as well as a sharp fall in economic activity. Low-interest rates and a highly competitive market resulted in the fall of net interest margin (NIM) to 2.03x in 2HFY20 as compared to 2.13x in 1HFY20. As a result of the increased resourcing to handle unprecedented COVID-19 demands and fixing its compliance issues, the bank made higher expenses during the year,

Earnings by Division (Source: Company Reports)

Outlook: The bank would also focus on its core consumer, business and institutional segments in order to tap future growth. With the focus on three priorities - fix, simplify and perform, the bank is targeting to become a simpler and stronger bank.

Valuation Methodology: Price to Book Value Multiple Based Relative Valuation (Illustrative)

Price to Book Value Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: As on 30^th September 2020, the bank recorded a CET1 ratio of 11.13%, which indicates a rise of 32 basis points over 31^st March 2020. In addition, the bank closed FY20 with Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR) of 151% and 121.7%, as compared to 146% and 116.1%, respectively, as on 30^th June 2020. We have valued the stock using the price to book value multiple based illustrative relative valuation and have arrived at a target price of low double-digit (in percentage terms). On a technical front, the stock of WBC has a support level of ~$17.132 and resistance level of ~$21.103. Thus, considering the favourable judgement in AUSTRAC matter, focus on business growth, rise in CET1, decent liquidity and funding, we give a “Buy” recommendation on the stock at the current market price of $20.290 per share, up by 0.049% on 11^th January 2021.

WBC Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

Resimac Group Ltd

RMC Details

Completion of Funding Transaction: Resimac Group Ltd (ASX: RMC) operates a residential mortgage lender and multi-channel distribution business, which specialises in Prime and Specialist lending. The market capitalisation of the company stood at ~$868.53 million as on 11^th January 2020. Recently, the company notified the market that its wholly-owned subsidiary RESIMAC Limited has completed a significant funding transaction “Resimac Premier Series 2020-3” of A$1 billion. As per the recent trading update, the company’s home loan settlements in July to October 2020 stood at $1.4 billion, wherein Prime and Specialist lending contributed by around 65% and 35%, respectively. As on 31^st October 2020, the home loan Assets Under Management stood at $12.7 billion as compared to 12.4 billion as on 30^th June 2020.

Decent Growth in Profit: For the year ended 30^th June 2020, the company recorded a normalised NPAT amounting to $55.7 million, reflecting a rise of 79% over FY19. In addition, the company recorded a rise of 19% in statutory NPAT to $56.0 million. This profit growth was derived from strong home loan portfolio growth of 21% to $12.4 billion.  In addition, the company witnessed a fall in cost-to-income ratio to 37.9%, which helped the company in generating growth of 820bps in Return on Equity to 25.5%.

Key Financials (Source: Company Reports)

Guidance: For 1H FY21, the company expects Normalised NPAT in the range of $48 million - $53 million, which indicates disciplined cost control, and Assets Under Management growth. In addition, the company is focused on a number of growth strategies to continue to drive revenue and profitability, which include organic lending growth and growth through acquisition.

Valuation Methodology: Price to Book Value Multiple Based Relative Valuation (Illustrative)

Price to Book Value Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: During FY20, RMC continued to cement its funding capabilities with successful diversification of banking and warehouse facilities. As on 30^th June 2020, the cash balance of the company stood at $366.0 million as compared to $224.8 million as on 30^th June 2019. In the last six and nine months, the stock has surged 120.29% and 304.54%, respectively. As a result, the stock is trading towards its 52-week high level of $2.280. Considering this, we have valued the stock using the price to book value multiple based illustrative relative valuation and arrived at a target price with correction of high single-double-digit (in percentage terms). For the purpose, we have taken peers such as Australian Finance Group Ltd (ASX: AFG), Commonwealth Bank of Australia (ASX: CBA) and Macquarie Group Ltd (ASX: MQG). On a technical analysis front, the stock has a support level of ~$1.257 and a resistance level of ~$2.279. Thus, considering the steep price movement in the past few months, higher valuation and current trading levels, we are of the view that most of the positive factors have been discounted at the current trading level and give an “Expensive” rating on the stock at the current market price of $2.200 per share, up by 3.286% on 11^th January 2021. We further suggest investors to wait for better entry levels.

RMC Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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