Westpac fails to satisfy a jaded market

While it was the new CEO's first result, the large institutional investors were just as anxious, interested in the progress being made on costs, market share growth and returns on shareholder equity. Unfortunately, they left disappointed, despite the company booking an interim profit of $701m, an increase of 5.3% on the previous year's result. There was also a healthy 8.4% increase in earnings per share, thanks largely to the buy-back over the period.

Poor comparison

So what's the explanation for the discontent? On a comparative basis this result wasn't anywhere near as good as Westpac's competitors - NAB managed to increase profits by 25% and ANZ by 14%. And when you consider that some of the earnings growth was generated through lower provisioning and tax expenses, it looks even worse.

There were a few more worrying signs too. The cost-to-income ratio deteriorated from 57.8% to 58.7% as staff costs blew out by $79m. Management stated that costs in the prior period were artificially low and while this may be the case, there's no doubt ANZ and NAB have more efficient operations and Westpac, unlike CBA, is not making progress in this regard. Westpac also announced that it will realise prior-year tax losses and that the second-half dividend will not be franked, a big disappointment for retail investors looking for tax-effective income support. However, while the market reacted negatively, the interim report did deliver several improvements:

• The return on capital employed increased from 15.5% to 16.4% with solid growth in volume and market share in home mortgages, credit cards and funds management;

• Expenses were reasonably flat but still require further initiatives in cutting floor-space, reducing administration expenses and gaining more benefits from the acquisitions of Challenge Bank and Bank of Melbourne;

• In line with other banks, non-interest income grew as a proportion of revenue, up by 6.4%. This growth provides solid support for Westpac's aim of reducing its reliance on interest-related income.

Despite these favourable points, it's unlikely that they will have an uplifting effect on the share price and we expect Westpac to lag behind other bank stocks, although there could be support from a share buy-back funded from their strong capital position. Not surprisingly, the share price has pulled back around 11.6% since our last review on April 23, 1999 (Hold - $11.60) and while ANZ and NAB look like better exposure to the banking sector, banks in general are still very worthy investments and we're still more than happy to HOLD Westpac.