Westpac: Result 2013

Westpac has produced another record profit and announced another special dividend against the wishes of the regulator. Revenue for the year ending September increased 4% to $18.6bn, with cash earnings increasing 8% to $7.1bn. Cash earnings per share increased 6% to $2.29, and a final fully franked dividend of 88 cents was declared (ex date 8 Nov), up from 84 cents. That brings the annual total to $1.74, for a yield of 5.1%.

Despite regulators recently warning Aussie banks to beef up their balance sheets rather than pay special dividends, Westpac announced another fully franked special dividend of 10 cents, bringing the annual total to 20 cents. While Westpac’s cost-to-income ratio of 41% and tier 1 capital ratio of 9.1% lead the sector, we’d also prefer fewer dividends today for more protection tomorrow given how low provisions for bad debts have become across the banking sector.

Net interest income, which makes up two thirds of Westpac’s total revenue, increased 3% to $12.9bn, despite margins remaining largely flat. According to chief executive Gail Kelly, ‘There is no doubt that domestically we are seeing a pick-up in consumer confidence which we expect will translate to a gradual increase in credit growth’.

While lending increased 4%, as did Australian housing loans, it was partially offset by higher mortgage repayments as customers take advantage of lower rates to repay loans faster. A 10% increase in deposits to $383bn more than funded the $22bn of loan growth, allowing the customer deposit-to-loan ratio to increase 3.8% to 71.4%. While higher deposits can reduce margins, it’s a much more stable source of funding compared to overseas wholesale funding, for example.

Non-interest income increased 7% to $5.9bn, with all Westpac’s major divisions including wealth management, insurance and trading reporting higher revenue.

Westpac’s result was also boosted by a 30% reduction in bad debts to $847m, chiefly from the St George and Institutional Banking businesses. Low interest rates and relative economic calm have reduced bad debts across the banking sector, but if/when interest rates return to more normal levels this trend should reverse. Consumer debt levels are also worth watching to gauge how hard local property speculators are competing with an avalanche of foreign bidders.

Westpac currently trades on a price-to-tangible-book ratio of 3.1, which is higher than the average of 2.9 since 1998. We’re comfortable with the recommendation guide for now, but remember to keep your portfolio limit in check as the big banks are largely priced for perfection. The share price has increased 19% since Time to sell the banks? from 30 May 13 (Hold – $28.60) and we’re sticking with HOLD.

Note: The model Income Portfolio owns shares in Westpac.