What's new? The banking mantra this year has been "strong result in a low-growth economy", and Westpac has followed the script. Cash earnings growth of 5 per cent and dividend growth of 6 per cent demonstrated how Westpac had negotiated the difficult environment in which corporate borrowing was weak and consumers were paying down personal balance sheets.
Westpac's cash earnings for the 12 months to September 30 this year were solid, coming in at $6.6 billion, an increase of 5 per cent on last year.
Westpac reorganised its divisions this year and it was the new Australian Financial Services Group that led the way. This division includes Australian retail banking, business banking and wealth operations, and increased its earnings by 14 per cent to $2.1 billion.
A theme in banking throughout 2012 has been the growth in deposits, and Westpac raised deposits by 11 per cent, or $13.4 billion.
In a low-credit-growth environment, the bank has been focused on cutting costs its retail bank knocked off $31 million in operating costs by cutting 800 jobs. Overall, the Westpac Group lowered its full-time equivalent employee numbers to 35,675, which is the lowest of the big four.
Westpac's balance sheet is continuing to strengthen. It is well positioned for the new Basel III accord and for any further unseen global economic shocks.
Outlook Australian banks always have plenty of opinions on the direction of the local economy, because their earnings stem from their understanding of domestic economic conditions. Westpac believes GDP growth in Australia will reach 3.2 per cent in the 2013 calendar year, a small decline on the 2012 figure of 3.5 per cent, but with a further decline in 2014 to 2.8 per cent. However, Westpac will no doubt benefit if forecasts of 5.5 per cent credit growth during the next two years are on the money. Westpac has arguably outperformed its peers in cutting costs this year. It also stands to gain from improvements in its wealth management arm, which we see as a sector investors should be exposed to in the long term.
Price Westpac shares have performed well in 2012, rising by about 25 per cent in the year to date. This puts them ahead of the game compared to other banking stocks, but for good reason in our view. A key target for the shares is now $28.50, and if it breaks this further, strong upward momentum may ensue.
Worth buying? We think Westpac remains one of the best exposures to the Australian banking sector. We further believe that retaining a strong exposure to Australian banks is a good investment strategy.
Westpac continues to offer considerable appeal from a valuation perspective and on income grounds.
Greg Fraser is an analyst at Fat Prophets sharemarket research.
Frequently Asked Questions about this Article…
What were Westpac's latest results and how did cash earnings perform?
Westpac reported cash earnings of $6.6 billion for the 12 months to September 30, a 5% increase on the prior year. Dividend payments also grew, with dividend growth of about 6% reported alongside the stronger cash earnings.
How did Westpac's Australian Financial Services Group contribute to the result?
Westpac reorganised its divisions and the new Australian Financial Services Group — which includes Australian retail banking, business banking and wealth operations — increased earnings by 14% to $2.1 billion, making it a leading contributor to the overall result.
Did Westpac see growth in deposits and why does that matter for investors?
Yes — deposits rose by 11%, equivalent to $13.4 billion. Deposit growth is important in a low-credit-growth environment because it strengthens the bank's funding base and supports balance-sheet resilience, which investors typically value.
Has Westpac cut costs or jobs as part of its strategy?
Westpac has focused on cutting costs in response to low credit growth. Its retail bank reduced operating costs by $31 million by cutting around 800 jobs, and the group lowered full-time equivalent employee numbers to 35,675 — the lowest among the big four Australian banks.
Is Westpac's balance sheet strong and prepared for regulatory changes like Basel III?
The article says Westpac's balance sheet is continuing to strengthen and that the bank is well positioned for the new Basel III accord and for potential global economic shocks, suggesting improved capital and resilience.
What economic outlook did Westpac give and how could that affect the bank?
Westpac forecasted Australian GDP growth of about 3.2% for the 2013 calendar year (down from 3.5% in 2012) and a further decline to 2.8% in 2014. The bank would likely benefit if forecasts of roughly 5.5% credit growth over the next two years materialise, as stronger credit growth tends to help bank earnings.
How have Westpac shares performed and is there a share price target?
Westpac shares had performed well in 2012, rising by about 25% year-to-date at the time of the article. The key target cited was $28.50 — the article suggested that breaking this level could lead to further upward momentum.
Is Westpac considered a good investment for everyday investors?
According to the article, Westpac is viewed as one of the best exposures to the Australian banking sector. The commentary highlights its appeal from valuation and income perspectives and notes potential upside from improvements in its wealth-management arm, making it an attractive option for investors seeking bank exposure.
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