Westpac Banking Corp: Expect final dividend to make up for no interim

About the author:

Azib Khan
Author name:
By Azib Khan
Job title:
Senior Analyst
Date posted:
19 August 2020, 11:40 AM
Sectors Covered:
Banks

  • Westpac Banking Corp (ASXWBC) has announced 3Q20 unaudited cash earnings of $1.32bn and the Board has decided to not declare an interim dividend for 2020.

Dividend uncertainty

Westpac Banking Corp's (ASX:WBC) Board has decided to not declare an interim dividend for FY20.

WBC has today made clear that APRA's current dividend guidance will allow it to pay out up to 50% of the statutory NPAT for FY20 when it considers its final dividend for FY20.

However, there is still much uncertainty about the quantum of the final dividend because WBC has today said that it will review capitalised software and goodwill carrying values in 4Q20, which together with the potential for an adverse change in the valuation of the life insurance business, potential for additional customer-related remediation provisions and potential for a top-up to the AUSTRAC-related provision in 4Q20, result in downside risks to the final dividend.

However, based on WBC's comments today we understand that if statutory NPAT is dragged down by the aforementioned items then WBC may engage in discussions with APRA in order to have a payout ratio greater than 50% of statutory NPAT approved, particularly because any change in the valuation of the life insurance business and changes in carrying values of goodwill and capitalised software will have no (or minimal) impact on regulatory capital ratios.

At this stage, we are factoring a $500m post-tax hit into our 2H20F statutory NPAT as a result of the aforementioned items.

Our FY20 final dividend forecast is based on FY20F statutory NPAT and a payout ratio of 49.95%.

We are forecasting a final dividend of 48cps.

Not too concerned about NIM outlook

The 3Q20 NIM of 2.05% is softer than we expected and the key drags on NIM in the quarter were a strong build-up of liquid asset balances, lower cash rate and higher term deposit costs.

WBC has intimated today that it does not expect to further add to liquid asset balances in a significant way, so we do not expect further headwinds from this factor in 4Q20.

Also, term deposit rates have been reduced in recent weeks, so we expect some of the term deposit pricing NIM headwind in 3Q20 to reverse in the coming two quarters.

Credit loss provisioning looks relatively conservative

The 3Q20 credit impairment charge was $826m, and this charge was almost entirely driven by an increase in collective provisions (CP).

We calculate that WBC's CP coverage of credit risk weighted assets (CRWA) increased by 13bps over 3Q20 to now be 1.53%.

This is now the highest CP coverage of the major banks, with CBA second at 1.44%.

WBC has said that following its 3-month customer check-ins, the number of outstanding mortgage deferrals is down 42%. 7% of WBC's total Australian mortgage portfolio balance had a deferral package outstanding as at 31/7/2020; this compares with ~10% for CBA and ~12% for NAB as at 30/6/20.

Investment view and changes to forecasts

We have reduced our FY20 cash EPS forecast by 1% and increased our outer year forecasts by ~2%.

We retain an Add recommendation. Our target price, based on our DDM valuation, is unchanged (Morgans clients can login to view detailed reports and price targets).

We emphasise that there are downside risks to our earnings and dividend forecasts as a result of the situation created by COVID-19.

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Disclaimer: The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.

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