Making Provisions

Westpac announced new and increased provisions (excluding impairment provisions) and asset write-downs totalling $1.4bn post tax to be taken in 1H20. This includes: 1) $1.03bn of provisions and costs associated with the Australian Transaction Reports and Analysis Centre (AUSTRAC) proceedings and response plan, including $900m for a potential penalty; 2) an increase in provisions for customer refunds, repayments and litigation of $260m; 3) a reduction in the value of several assets costing around $70m; and 4) cost of changes in the provision of life insurance of $70m.

 

We had already included a $1bn AUSTRAC provision in our 2H20 estimates, alongside $80m of pre-tax costs for the response plan in FY20.

 

Westpac has not yet finalised the collective provision charge in anticipation of the impact from COVID-19, and will update the market once this has been finalised. In our forecasts we have increased the concentration of our collective provision coverage build-up in 1H20, offset partly by a second-half reduction. Our loan loss charge is 41bp of gross loans and acceptances in 1H20, 36bp in 2H20, and 38bp in FY20 versus our previous forecast of 35bp.

 

Westpac estimates these charges will lower its common equity tier-one (CET1) ratio by 30bp versus the December 2019 CET1 ratio of 10.8%. We forecast Westpac will hold its CET1 ratio at 10.8% in 1H20, with the lift in collective provision coverage and one-off charges broadly offsetting underlying profits in the second quarter. We have cut our 1H20 dividend forecast further; we now assume 30cps, a 63% reduction from 80cps in 2H19. However, we believe this will likely be declared belatedly, if at all, as for Bank of Queensland (BOQ, Hold).

 

Our cash EPS forecasts have reduced 12% in FY20, reflecting the one-offs and higher impairment expenses, and fallen 1% in FY21, with FY22 remaining flat. We assume Westpac will take a further $100m AUSTRAC provision top-up in 2H20 for $1bn in total. We maintain our Accumulate recommendation with a target price of $18.00.

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