Lacking Something

Westpac reported cash earnings of $8.1bn in FY17. Second-half cash earnings of $4.0bn came in 1% below our estimate due to higher provisions and customer refunds, and much lower Markets income. A final dividend of 94cps (fully franked) was declared, taking the full-year dividend to 188cps.


  • One-off customer refunds came in at $169m versus our $65m estimate. Excluding this, the second-half result would have been marginally higher at the cash net profit line and 1.5% lower pre provisions. More significantly, Markets & Treasury income fell $350m, or 35%, half-on-half, marking the lowest total since second-half FY14. Excluding these items, the result would have appeared more reasonable. We believe Markets income will recover, although it could be a gradual process.
  • Net interest income increased 4% in the second half, benefiting from a positive impulse from margins, which were up 3bp over the half. This was due mainly to loan repricing and cheaper wholesale funding, which together added 9bp to margins, offset partly by the bank levy, which created a 2bp headwind.
  • Credit quality was strong with a common equity tier-1 ratio of 10.6%, 20bp above our estimate. We believe this puts capital management firmly into view in the medium term, and we have allowed for a 10cps special dividend each half from first-half FY19 to second-half FY20.
  • Management’s FY18 outlook commentary appeared somewhat underwhelming at first glance, with headwinds to net interest margins due to customers switching from interest-only to principal-and-interest mortgages, and a modest fee income drag. Commentary at the result briefing was more reassuring, however, with the fourth-quarter margin 2bp higher than the second-half FY17 average, and deposit and wholesale funding costs providing support.

We have increased our cash earnings forecasts by less than 1% over FY18–20 on our expectation of higher net interest income and lower bad debts, offset by higher costs and lower non-interest income. Westpac does not look expensive to us, but a positive catalyst to rerate the stock may be lacking in the short term. Capital management should offer some support in the medium term, but for now we maintain our Hold recommendation on the stock with a $33.00 target price.

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