Westpac: Result 2018
Recommendation
While its peers are slimming down and selling wealth divisions, Westpac is staying the course.
No doubt, management believes it can do better than peers with its BT Financial Group (BTFG). Indeed, BTFG has performed well historically, albeit with the mistreatment of some customers (for which it is now paying).
Westpac has also backed BTFG with significant investment, such as the development of its Panorama wealth platform which is estimated to have cost over $500m.
Key Points
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Sticking with wealth management
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Margin pressure evident
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Dividend unchanged
If any bank can succeed in wealth management, it would be Westpac. Yet, we have some reservations with the strategy. Westpac's range of divisions makes it more complex and harder to manage compared to its peers that are increasingly focused on core banking operations.
Indeed, Westpac's banking operations are among the best in the country, second only to Commonwealth Bank, with a high-quality retail business and the second largest share of Australian residential mortgages and low-cost household deposits.
That combination has historically yielded good margins and profitability. This was evident again in Westpac's latest result, which yielded flat cash earnings of $8.1bn despite some margin pressure in its mortgage business.
Expenses jump
Revenue grew 1.5% in the year to September, to $22.1bn, and the group's overall net interest margin rose to 2.13%, from 2.06% in the prior year.
That, however, disguises a fall in margins for the Australian home loan portfolio in the second half. This was largely due to a combination of higher funding costs, greater competition for mortgages and the shift of its product mix away from the more profitable interest-only home loans. These pressures pushed the net interest margin for the consumer business down from 2.37% in the first half to 2.11% in the second half.
We expect these lower margins to persist, but we expect Westpac to manage its them appropriately and for the divsion to remain very profitable. It achieved a return on equity of 14.4% for the full year (above the group total of 13.3%), with cash earnings of $3.1bn only a little lower than the $3.2bn in 2017.
Year to 30 Sep ($m) | 2018 | 2017 | /(-) (%) |
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Net int. income | 16,339 | 15,704 | 4 |
Non int. income | 5,612 | 5,852 | (4) |
Net op. income | 21,951 | 21,556 | 2 |
Op. expenses | (9,586) | (9,105) | 5 |
Profit before impairments | 12,365 | 12,451 | (1) |
Impairments | (710) | (853) | (17) |
Cash earnings | 8,065 | 8,062 | 0 |
Cash EPS ($) | 237.5 | 238.0 | - |
Dividend ($) | 1.88 | 1.88 | - |
* Fully franked, ex date 14 November, no discount to DRP |
Group expenses were 5% higher at $9.6, largely due to the legal costs to comply with the Royal Commission and resulting compensation to customers. In all, there were one-off costs of $233m and, excluding them, expenses were up 3%.
Impairments fell to just 0.10% of loans from 0.13% in 2017, which is similar to the experience of the other big banks. We'd expect impairments to average several times their current levels over the course of an economic cycle. It's impossible to say when they might rise, but we recently investigated what might happen to Westpac in a high stress scenario.
Dividends aplenty
Westpac's common equity tier 1 ratio of 10.6% is above the regulator's requirement for it to be 10.5% by the start of 2020. Full-year dividends were unchanged at $1.88, fully franked. Future dividends will depend on how earnings fare, though there's not much wiggle room given the high payout ratio of 80%. Westpac isn't going to buy back shares to offset its dividend reinvestment plan, so that reduces some of the burden of the payout ratio.
Westpac is a well-capitalised, high-quality bank available at an attractive price. We don't expect much growth over the next few years, but it will return at some stage. That means dividends will be the primary source of returns, though with a dividend yield of 6.8% (nearly 10% grossed up), we're OK with that. BUY.
*Please note our recommended maximum portfolio weightings of 8% for Westpac individually and 20% for the banking sector as a whole. More conservative investors and those with other exposure to the property market should use lower limits.