Should you be buying Westpac Bank ?

Westpac Banking Corporation 
 
Westpac reported its 2015 interim financial results and the operating divisions, especially retail and business banking, delivered though with a lower bottomline.. Cash earnings were affected by adjustments for derivatives and lower earnings from Treasury operations. Strength continues to be a feature of the group and the economic outlook is positive even though there are some near-term challenges. The focus continues to be strategy with an increased emphasis on service.
 
Cash earnings at $ 3.778 billion was down by 2% compared to the second half of 2014 while cash EPS was down by the same percentage to 121.3 cents per share. The reported NPAT was down 8% to $ 3.609 billion and NIPM excluding Treasury and Markets was flat at 2.01%. The impairment charge to average gross loans was flat at 11 basis points and return on equity was down 54 basis points to 15.8%. The common equity tier 1 capital ratio was down 21 basis points to 8.8% and the fully franked interim dividend was 1% higher at $ .93 per share. Cash earnings growth from the operating divisions was 1.4% and core earnings growth was 2.2% while total group cash earnings came to $ 3.778 billion after negative derivative adjustments of $ 85 million.


Capital Ratio (Source - Company Reports)
 
The strength of the group is evident with a stable funding ratio of 83.2% compared to 3.2% for the preceding half year, total liquid assets of $ 137 billion compared to $ 134 billion, stressed assets to TCE of 1.1% compared to 1.2% and common equity tier 1 ratio of 8.8% compared to 9%.Capital management has been prudent and the group, already well capitalised, is moving to the upper end of its preferred range. A 1.5% discount has been applied to the DRP market price and the DRP is being partially underwritten. This adds approximately $ 2 billion to the capital. The $ .01 per share increase in the dividend is well supported by the robust operating performance and the payout ratio works out to 75% excluding the adjustments for derivatives. The dividend yield works out to approximately 5.1%.



Dividends (Source - Company Reports)

Cash earnings from retail and business banking have been growing consistently with Westpac RBB growing 2% to $ 1.350 billion, St George by 4% to $ 837 million and Westpac NZ by 2% to NZ $ 441 million. The customer franchise has also been steadily built up from 9.8 million (6.2 million WRBB and 3.6 million SGB) to 10.1 million (6.4 million WRBB and 3.7 million SGB) and the percentage of customers with a wealth product is now 21.8%.


Total Consumer Satisfaction (Source - Company Reports)

BT is a growing franchise though earnings from insurance claims were down. Total cash earnings were down 2% to $ 451 million made up of $ 29 million from capital and others, $ 131 million from insurance and $ 291 million from Funds Management. FUM and FUA were up 26% to $ 103 billion and 17% to $ 126 billion respectively while general insurance gross premiums grew 8% to $ 246 million and life in force premiums 13 % to $ 827 million.
 
The strategy outlook
 
The strategic priorities are performance discipline in being the best performing bank in the region which ROE in excess of 15%, service revolution by way of growth in the customer franchise, digital transformation resulting in a expense to income ratio, targeted growth in Asia especially for wealth and SME customers and encouraging employee talent with a leading position in employee engagement. The expectations for the operating environment are mixed global economic conditions though the outlook for Australia continues to be positive. The economy is currently in transition with an anticipated GDP growth for 2015 of around 2.2%. There will be uneven growth across the different sectors of industry and geography and an improvement in consumer and business confidence is going to be important. When it comes to Australian banking, credit growth will be modest and housing will grow faster than business. Asset quality is expected to continue strong and competition will remain intense especially in the low interest rate environment. Regulatory uncertainty will be a consideration though continuing growth is expected from the wealth and insurance markets.


WBC Daily Chart (Source - Thomson Reuters)
 
The group is well positioned for its third century and its drivers of value are in good shape because each division is performing well in pursuance of a clear strategy. There is a high quality management team in place which can provide balance management to the businesses. The Service Revolution Program is well on its way to deliver a better experience for customers. The strong balance sheet is of great help in dealing with regulatory uncertainty and the group can be expected to continue delivering value to investors. All the divisions are expected to continue good momentum and disciplined growth will continue in housing, business lending, household deposits and wealth services. Competition for assets is expected to continue with the lower yield being offset by lower costs for funding and deposits.

Productivity benefits are expected to continue which should largely offset the normal increase in business expenses though amortisation in the second half of 2015 is expected to be higher. Impairment charges will continue to be low though there will be fewer write backs.
 
We have no doubt that the group is financially strong and well managed but clearly earnings growth is slowing and the decline, though modest, in the latest earnings clearly indicate the continued difficult conditions in which Australian banks are operating. Under the circumstances, this share looks expensive and somewhat overpriced and we would recommend that you stay away from any investment for the moment.

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