Westpac Banking Corp: Still expecting no further capital raisings

About the author:

Azib Khan
Author name:
By Azib Khan
Job title:
Senior Analyst
Date posted:
14 January 2020, 2:20 PM
Sectors Covered:
Banks

  • Our base case remains one of no further capital raisings by WBC over our forecast period. In the absence of an AUSTRAC-related civil penalty and assuming no further customer remediation-related charges, we expect WBC to have ~$4.5bn of surplus CET1 capital (at Level 2) at end-FY20F.
  • WBC's relative share price performance since the AUSTRAC allegations were announced can be interpreted to mean that over $5bn has been shaved off WBC's market capitalisation as a result of the AUSTRAC allegations. We believe this damage to the share price is overdone. WBC remains our preferred major bank.

Operational risk capital add-ons now total $1bn

APRA announced last month that it has formally commenced an investigation (as of 17 December 2019) into possible breaches of the Banking Act 1959 by WBC.

As part of the same announcement, APRA increased WBC's operational risk capital requirement by $500m effective as of 31 December 2019; this brings the total operational risk capital add-ons that WBC is required to hold to $1bn, following the $500m capital add-on announced by APRA in July 2019.

Base case remains one of no further capital raisings

We have adjusted our forecasts for the additional $500m operational risk capital add-on.

Our base case remains one of no further capital raisings (excluding dividend reinvestment plans) by WBC over our forecast period.

In the absence of an AUSTRAC-related civil penalty and assuming no further customer remediation-related charges, we expect WBC to have ~$4.5bn of surplus Level 2 CET1 capital (above APRA's 10.5% 'unquestionably strong' benchmark) at end-FY20F.

With our continued forecast of a $1bn AUSTRAC-related civil penalty, we are forecasting WBC to have ~$3.5bn surplus Level 2 CET1 capital at end-FY20F.

WBC remains our preferred major bank

In terms of share price performance since the AUSTRAC allegations were announced, while WBC has outperformed NAB, WBC has underperformed ANZ and CBA by over 6%.

This can be interpreted to mean that more than $5bn has been shaved off WBC's market capitalisation as a result of the AUSTRAC allegations.

In light of our base case of a civil penalty of $1bn for WBC, and taking into account the additional $500m capital add-on as well as upside risk to our operating expense forecasts, we believe the damage to WBC's share price is overdone.

Investment view and changes to forecasts

We have reduced our cash EPS forecasts by 3.8%/2.4%/2.3% for FY20F/FY21F/FY22F respectively due to the following factors: the Share Purchase Plan (SPP) raised $270m more than we expected; we no longer expect the next DRP to be neutralised; we have reduced our 1H20 non-interest income forecast as we expect a rise in general insurance claims stemming from the bushfires; and we have increased our operating expense forecasts as we now expect higher compliance costs in light of AUSTRAC-related issues.

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

More information

Morgans clients can login to view our detailed report and share price target for Westpac Banking Corp (WBC). Alternatively, please contact your Morgans adviser or nearest Morgans office for access.

Disclaimer: Analyst may own shares.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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