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WESTPAC (WBC)

By InvestSMART · 16 Nov 2011

By InvestSMART ·
16 Nov 2011

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WESTPAC (WBC)

Banks take a little cut of everything we do, so why not get some of it back by owning the shares of your own bank?

Westpac certainly helped itself during the 2011 financial year and proudly announced a cash profit of $6.3 billion. That was a subdued increased of 7.3 per cent compared with bigger increases from its rivals but Westpac looked after its shareholders better in terms of its dividend.

At 10.2 per cent, including franking credits, Westpac's gross dividend yield is not to be sneezed at and easily outpaces the equivalent yield of the broader S&P/ASX200 Index of 6.7 per cent.

For investors who can cope with even a modicum of risk, owning Westpac shares looks far more attractive than placing money in a 12-month term deposit that yields just 5.3 per cent before tax.

The income side of the equation looks compelling. The earnings part is a more complex story as lending growth is slowing and the profit boost from lower bad-debt charges is dissipating. Westpac is already the leanest bank of the big four, with a cost-to-income ratio of 41.5 per cent, but the search for more efficiency doesn't begin and end with headcount.

Westpac has now fully absorbed St George Bank and the quest for greater productivity goes on with several big projects still under way across the group.

Plain old banking is now being supplemented by wealth management products from BT Financial Group. As the superannuation pie continues to grow, Westpac will get a slice of that action.

Price

Westpac's own balance sheet is robust. It will comfortably meet the new world capital adequacy requirements and has a much smaller exposure to volatile wholesale funding markets than a few years ago. A higher proportion of customer deposits on its loan book is the reason for this. Along with its Australian peers, Westpac maintains a AA credit rating.

At $340 billion, it not only has the largest mortgage book but also has the highest ratio of mortgages to total loans. Westpac reported that 55 per cent of its customers are ahead on their mortgage repayments, with some more than two years ahead.

Even if house prices are static at best, the housing market is looking safe, from the bank's point of view. With shares about $21, investors are paying only 10 times historic earnings and enjoying a substantial dividend yield.

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Frequently Asked Questions about this Article…

What dividend yield does Westpac offer and how does it compare to the S&P/ASX200?

According to the article, Westpac's gross dividend yield is about 10.2% including franking credits. That easily outpaces the equivalent yield of the broader S&P/ASX200 index, quoted at about 6.7% in the article.

How profitable was Westpac in the 2011 financial year?

The article reports Westpac posted a cash profit of $6.3 billion in the 2011 financial year, a 7.3% increase. The piece notes the profit rise was more subdued than some rivals but that Westpac delivered strong shareholder income via dividends.

Is Westpac’s balance sheet and credit profile considered strong?

Yes. The article describes Westpac's balance sheet as robust: it should comfortably meet new capital adequacy requirements, has reduced exposure to volatile wholesale funding by funding more loans with customer deposits, and—like its big Australian peers—retains an AA credit rating.

How big is Westpac’s mortgage book and what does loan performance look like?

The article states Westpac has a $340 billion mortgage book, the largest among peers and with the highest ratio of mortgages to total loans. It also reports 55% of customers are ahead on mortgage repayments, with some more than two years ahead, suggesting loan performance is relatively healthy from the bank’s perspective.

Should income-focused investors choose Westpac shares over a 12-month term deposit?

The article suggests income-seeking investors who can accept some risk may find Westpac shares attractive because the gross dividend yield (about 10.2% including franking) is materially higher than a typical 12‑month term deposit yield quoted at 5.3% before tax. However, the article also implies shares carry more earnings and market risk than a term deposit.

How has the integration of St George Bank affected Westpac?

The article says Westpac has fully absorbed St George Bank. That consolidation is part of an ongoing drive for greater productivity across the group, with several large efficiency projects still underway.

What role does BT Financial Group play in Westpac’s business strategy?

According to the article, BT Financial Group supplements Westpac's traditional banking with wealth-management products. As the superannuation market grows, Westpac aims to capture a share of that expanding wealth-management revenue stream.

How is Westpac valued and how efficient is the bank compared with peers?

The article notes that at roughly $21 a share, investors are paying about 10 times historic earnings for Westpac, while it reports a cost-to-income ratio of 41.5%—described as the leanest among the big four Australian banks—though the search for further efficiency continues.