Westpac Banking Corporation 

WBC Details 

Recorded an Improved Cash Earnings: Westpac Banking Corporation (ASX: WBC) provides a range of banking and financial services in these markets, including consumer, business and institutional banking and wealth management services. WBC has posted a significant improvement in its cash earnings. The cash earnings were increased to $3,537 million in 1HFY21 as compared with $993 million in 1HFY20. Similarly, the Cash Earnings Per Share (CEPS) were increased to 97.1 cents in 1HFY21 as compared with 27.7 cents per share in 1HFY20. The cash Return on Equity (ROE) was improved to 10.2% in 1HFY21 compared with 2.9% in 1HFY20. Due to a turnaround in impairment charges and lower impact from large, infrequent items, WBC has registered improved cash earnings in 1HFY21. 

Cash Earnings (Source: Company Reports) 

Dividend Declaration:  WBC has decided to pay an interim dividend of 58 cents per share to its shareholders due to a rise in its cash earnings. The dividend will be paid on 25 June 2021, with the record date of 14 May 2021.

1HFY21 Financial Highlights: The company has registered a decline in NII to $8,348 million in 1HFY21 as compared with $9,000 million in 1HFY20 due to lower interest rates and a decline in high returning loans. Despite lower NII, the company has registered an increase in net profit to $3,445 million in 1HFY21 as compared with $1,191 million in 1HFY20 due to an impairment benefit of $372 million in 1HFY21 as compared with an impairment charge of $2,238 million in 1HFY20. WBC has posted a decline in its cash and bank balances position to $33,877 million as of 31 March 2021 as compared with $45,815 million as of 31 March 2020.

Key Risks: The company is exposed to liquidity risk. The company is mandated to maintain liquidity ratios above the regulatory threshold. WBC requires regulatory approvals to carry out its business efficiently. Any delay in regulatory approval may result in financial losses for the company.

Outlook: WBC is witnessing a positive consumer sentiment returning with an increased customer deposit in 1HFY21. The company expects the Australian economy to expand by 4.5% in 2021, leading to a 4.6% increase in total credit, with residential lending increasing by 6.5%. 

Valuation Methodology: Price/Book Value based Relative Valuation Method (Illustrative) 

Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks. 

Stock Recommendation: In the last one month, WBC has increased by ~7.00% and by ~23.81% in the last three months. The current market capitalisation of WBC stands at ~$91.64bn as of 3 May 2021. The stock is currently trading above the average 52-week price level range of ~$14.910-~$26.315. On the technical analysis front, the stock has a support level of ~$25.373 and resistance of ~$27.028. We have valued the stock using a Price/Book Value multiple-based illustrative relative valuation method and arrived at a target price of high single-digit upside (in % terms). We believe that the company can trade at a slight discount as compared to its peer average, considering a decline in its cash position and a decline in its NII. For this purpose, we have taken peers Commonwealth Bank of Australia (ASX: CBA), National Australia Bank Ltd (ASX: NAB), Australia and New Zealand Banking Group Ltd (ASX: ANZ). Considering improved cash earnings, an increase in net profits, valuation, and current trading levels, we recommend a “Hold” rating on the stock at the current market price of $26.230, up by ~5.00% as of 3 May 2021.

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

Note: Investment decision 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 Valuation has been achieved and subject to the factors discussed above.

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