Westpac Banking Corp – Negativity still looking overdone
About the author:
- Author name:
- By Azib Khan
- Job title:
- Senior Analyst
- Date posted:
- 28 September 2018, 2:21 PM
- Sectors Covered:
Fees-for-no-service and inadequate advice the key areas
Westpac Banking Corp (WBC) has announced that its FY18 cash earnings will be reduced by an estimated $235m following continued work on addressing customer issues and from provisions related to recent litigation. The main areas of remediation called out today relate to the fees-for-no-service issue associated with WBC's salaried financial planners as well as inadequate advice provided by these planners. Today's announcement is not exactly a surprise as WBC's 'get it right put it right' provisions prior to today's announcement did not appear to include fees-for-no-service as a key element of the provisions.
Composition of P&L impact
WBC expects approximately two thirds of the cash earnings impact to be recorded as negative revenue and the remainder to be recorded as costs. Given that the bulk of the negative revenue impact appears to relate to the fees-for-no-service and inadequate advice issues, we assume approximately 75% of the negative revenue impact will go through the non-interest income line and the remainder will go through the net interest income line. We therefore expect a 1bp reduction in the net interest margin as a result of the announced provisions.
WBC had previously provided FY18 cost growth guidance of 2-3% (excluding the Hastings impact) and we expect approximately 50% of the cost component of today's announced provisions to be absorbed within this cost growth guidance range.
We reiterate our view on provisions stemming from the Royal Commission
While we continue to see the risk of additional provisions for the major banks stemming from the Royal Commission, we do not expect the additional provisions to hamper the ability of the major banks to achieve APRA's 'unquestionably strong' CET1 benchmark by January 2020 in an orderly manner. Our view is consistent with WBC today stating that it remains well placed to meet APRA's unquestionably strong' benchmark.
From our perspective, the main outstanding issue for WBC now relates to fees-for-no-service and inadequate advice provided by WBC's aligned financial planners (i.e. the Securitor and Magnitude businesses). WBC has said that the 'get it right put it right' program of reviews will continue into FY19 and this includes aligned planners.
Investment view and changes to forecasts
As a result of today's announced provisions, we have reduced our FY18F cash earnings per share by 2.3%. Our forecasts for FY19 and FY20 remain unchanged. Our share price target remains unchanged. Key downside risks to our target price include a material increase in funding costs and greater-than-expected deterioration in asset quality.
WBC remains our preferred major bank. We retain our Add recommendation.
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