Measured dividend in market dominance
As with all its major banking peers in the Australian market, Westpac continues to post solid earnings performances on an ever-increasing base, despite the subdued credit-growth environment.
While it has not provided a recent trading update such as Commonwealth Bank or ANZ, we believe Westpac has largely maintained the solid momentum from its full fiscal 2012 result reported in November.
Recent presentations from the company show a bank in an excellent capital position. Westpac's common equity ratio continues to improve, ending the first quarter of fiscal 2013 (ending December 2012) at a healthy 8.8 per cent.
This is significantly above the capital trigger event level of 5.125 per cent, and is equivalent to a surplus capital of about $10 billion.
Since the tumultuous spike in the dark days of the global financial crisis, the company's exposure to distressed borrowers has also declined substantially, with its stressed exposure as a percentage of total committed exposure at less than 2 per cent.
Westpac's funding arrangements are in solid shape, underpinned by an increasing customer deposit-to-loan ratio of 68.3 per cent, thus materially reducing its dependence on the wholesale market and shielding the bank from any unforeseen global shocks to the banking system.
Despite the persistently low credit-growth environment since the GFC, we believe Westpac will continue posting mid single-digit earnings growth, driven by an improving credit risk profile and long-tailed productivity gains. Being one of the biggest banks in one of the world's most stable financial systems also has its benefits, aided by a captive population (and investor) base.
Also, it boasts one of the strongest capital positions among financial institutions in not only Australia but the world. Indeed, Westpac's financial strength is such that it is capable of distributing a special dividend later in 2013, without compromising its balance sheet in any way.
The stocks of the big four Australian banks have done extremely well in recent months, particularly relative to the overall market.
Even within that elite blue chip group, however, Westpac has been a standout, with its stock price up 23 per cent and 43 per cent during the past six and 12 months, respectively.
We continue to view Westpac as one of the best exposures to the Australian banking sector, given its market strength, an enviable capital position and the prospect of a special dividend.
However, after the exceptionally strong rally in recent months, the stock is trading at 14.3 times fiscal 2013 consensus earnings per share estimates.
This multiple represents a premium to the Australian major bank average of about 6 per cent, and is certainly above Westpac's own historical average of about 12 times. Its price-to-book ratio of 2.1 times is also at an elevated level.
As a result, we believe it is prudent for those without exposure to wait for a pull-back in the stock price before buying.
Brian Han is senior research analyst at Fat Prophets. To receive a recent Fat Prophets Report, phone 1300 881 177 or email firstname.lastname@example.org.