Westpac Banking Corp: High quality beat versus consensus

About the author:

Azib Khan
Author name:
By Azib Khan
Job title:
Former Senior Analyst
Date posted:
03 May 2021, 12:30 PM
Sectors Covered:

  • Westpac Banking Corp (ASX:WBC) has announced 1H21 cash NPAT of $3,537m. While this is 2% less than our expectation, we estimate it is ~9% better than Factset consensus. We view this result as a high-quality beat versus consensus, partly due to our view that there is a high level of conservatism reflected in WBC’s credit loss provisioning. An interim dividend of 58cps (ff) has been declared, lower than our expectation of 70cps.
  • Details of the cost rest program announced today are very exciting, and we continue to see cash EPS upside for the major banks sector from absolute cost reduction over the medium term.
  • The bad debt provision outcome and net interest margin outcome for WBC in 1H21 are both notably better than consensus expectations and we expect similar beats versus consensus to be seen when Australia and New Zealand Banking Group (ASX:ANZ) and National Australia Bank (ASX:NAB) report their 1H21 results later this week.

Cost reset target very exciting

As part of the cost reset program that has been announced, WBC has set a cost base target of $8bn (excluding notable items) by FY24F. This compares with an underlying cost base of $10.2bn in FY20.

The first part of the cost reset program involves the exit of non-core businesses which currently account for ~$750m of the cost base; the three remaining businesses which WBC is looking to sell are life insurance, auto finance, and Superannuation, Platforms & Investments.

The second part of the cost reset program involves digitisation and streamlining for customers.

The third part of the cost reset program involves head office and organisational simplification. No restructuring provision has yet been raised as part of this cost reset program, and pleasingly, WBC has said it will not increase its annual investment spend run-rate such that cumulative investment spend is expected to be $3.5-4bn over the next three years.

Costs are expected to rise in FY21 (compared with FY20 ex-notables) before falling from FY22F onwards. We have reduced our operating expense forecasts for FY22F and FY23F.

Capital management potential is increasingly exciting

WBC’s CET1 ratio of 12.3% at Mar-2021 is better than our expectation of 12.1%. This ratio compares with APRA’s ‘unquestionably strong’ benchmark of 10.5%. We are forecasting surplus CET1 capital (above 11.0%) of ~$7.5bn at end-FY22F, equating to surplus capital of ~$2 per share; and this is before allowing for the potential sale of the remaining non-core businesses.

The capital management potential is made all the more exciting by WBC’s high balance of franking credits. WBC has today said that it is awaiting the finalisation of APRA’s new capital rules before it considers returning capital.

Investment view and changes to forecasts

We have reduced our cash EPS forecast by 5% for FY21F. We have increased our cash EPS forecasts by 1.3%/2.7% for FY22F/FY23F respectively. These changes are detailed inside this report. We retain an Add recommendation. Our target price, based on our DDM valuation, has changed (login to view).

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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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