Westpac Banking Corporation

WBC Details

Fall in Earnings Due to Higher Impairment Charges: Westpac Banking Corporation (ASX: WBC) provides banking and financial services, including payment services, interest rate risk management, lending, deposit taking, etc. The market capitalisation of the bank stood at $64.68 Bn as on 2^nd November 2020. The financial year 2020 proved very challenging for the bank and as a result, it witnessed a drop of 66% in statutory net profit to $2,290 million. This was impacted by higher impairment charges, increased notable items as well as the steep decline in economic activity. Net Interest Margin for the year stood at 2.08%, reflecting a fall of 4 basis points, due to low interest rates and strong competition.

Maintained Strong Balance Sheet: The bank maintained robust balance sheet with Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR) of 151% and 121.7% as on 30^th September 2020 as compared to 146% and 116.1% as on 30th June 2020. In addition, the CET1 capital ratio for the period stood at 11.13%, which happens to be the highest level for the last 20 years. As a result of this, the bank declared final dividend of 31 cents per share, which is to be paid on 18^th December 2020.

Key Financials (Source: Company Reports)

Update on AUSTRAC Matter: In the month of September 2020, the bank signed an agreement with AUSTRAC to resolve the proceedings, which is subject to Court approval. In addition, the bank has approved to pay a penalty of $1.3 billion for the admitted contraventions of the Anti-Money Laundering and Counter-Terrorism Financing Act 2006.

Outlook: In the upcoming year, the bank is expecting its business growth at a slower pace. In addition, the bank may continue to witness higher uncertainties due to containment of the virus, the gradual unwinding of support measures, as well as the prospects for the global economy. Moreover, low interest rate environment could be a headwind for business growth. However, the bank would move forward to deliver value to shareholders with its strong balance sheet and the financial resources. The bank’s performance is also dependent on the RBA’s (Reserve Bank of Australia) monetary policy decision, which has been scheduled to release on 6^th November 2020.

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

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

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

Stock Recommendation: The bank seems to be well-positioned to support its customers on the back of a strong balance sheet and sufficient liquidity. In the past six months, the stock of WBC has provided a return of 15.22%. On a technical front, the stock of WBC has a support level of ~$16.008 and an immediate resistance level of ~$19.031. We have valued the stock using the price to book value multiple based illustrative relative valuation and have arrived at a target price of higher single-digit (in percentage terms). For the said purposes, we have considered National Australia Bank Ltd (ASX: NAB), Commonwealth Bank of Australia (ASX: CBA), Bank of Queensland Ltd (ASX: BOQ), etc., as peers. Therefore, considering the decent returns to shareholders, strong balance sheet and upcoming monetary policy release by RBA, we give a “Hold” recommendation on the stock at the current market price of $17.800 per share, down by 0.615% on 2^nd November 2020.

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

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