Dividend Deferral

Westpac Banking Corp posted a slightly stronger first-half FY20 result than Ord Minnett forecast, albeit relative to low expectations, with a revenue decline on an underlying basis of 2% and a fall in pre-provision profit of 5%. As expected, the interim dividend was deferred.


Given much of the result was pre-guided the previous week, i.e. a common equity tier-one (CET1) ratio of 10.8% and impairments at 62 basis points of gross loans and acceptances, there were few surprises outside of better net interest income on higher liquidity and net interest margin (NIM).


The NIM outlook for 2H20 also appears okay versus its peers, but Westpac is likely to see more subdued loan growth than the other banks, given mortgage processing issues and lower institutional drawdowns.


Westpac seems happy to run down its capital buffer and, on the base-case scenario, it should stay above the 10.5% CET1 ratio level required by the Australian Prudential Regulation Authority (APRA), assuming it does not pay an interim dividend and there are not too many nasty surprises in the second half of FY20.


Westpac’s expenses trajectory is lagging its peers. The bank walked back from its $500m productivity target, and we see near-term expense headwinds from regulatory and compliance costs, amortisation expenses and higher upfront expensing of investment spending.


We have lowered our cash net profit forecast for FY20 by 2%, but raised our estimates for FY21 and FY22 by 1%. Generally, higher net interest income has offset lower non-interest income and slightly higher costs. We have allowed for a $200m provision top-up for the Australian Transaction Reports and Analysis Centre (AUSTRAC) court action and $100m of remediation costs in 2H20.


As with ANZ Bank (ANZ, Hold), Westpac looks inexpensive to us at an FY21E price to book value ratio of 0.8x and an FY21E price to earnings ratio of 10.3x, and it is now well-provisioned. Revenue growth still looks anaemic, however, leading us to maintain our Hold recommendation, although we have lifted our target price to $16.75 from $16.00.

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