One Bank to sell - Westpac Banking Corp

Westpac Banking Corp

WBC Details
 
Following an assessment of Australia’s Macro Profile, Moody’s (Moody’s Investors Service) has downgraded the long-term ratings for the major Australian banks (including Westpac Banking Corporation) by one notch to Aa3 from Aa2. It has revised the rating outlook for the major Australian banks to “stable” from “negative”. However, short term issuer credit ratings for the major Australian banks (including Westpac) were unchanged. Importantly, the change was driven by deteriorating credit conditions in Australia with elevated levels of debt and rapid credit expansion as they will lead to credit quality problems later. Notably, rising household debt in the situation of low nominal wage growth has led to very high levels of household leverage, thereby increasing the household sector’s and the banking sector’s sensitivity to some potential risks.

Based on Westpac Banking Corporation’s balance sheet at 31 March 2017, recently announced 0.06% (6 basis points) levy in the 2017 Federal Budget will apply to approximately $615 billion of Westpac’s liabilities (‘Impacted liabilities’). Impacted liabilities would exclude certain prescribed items including approximately $174 billion of financial claims scheme eligible deposits. The Levy is expected to be tax deductible, but will not attract franking credits (Australian tax imputation credits). Based on the estimates, it would result in an additional cost of approximately $65 million after tax in H2FY17. On an annualized basis, that represents a cost of around $370 million or around $260 million after tax. However, the exact cost will depend on the final form of the new legislation passed and the composition of Westpac’s liabilities. The impact of the Levy for shareholders was estimated at around 8 cents per share, which represents 4.3% of dividends paid (188 cents per share) in 2016. Given the impact of new levy and increasing pressure on net interest margins in the sector, we give a “Sell” recommendation on the stock at the current price of $29.77


WBC Daily chart; (Source: Thomson Reuters)

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