Subdued Outlook

Westpac Banking Corporation reported a first-half FY19 cash net profit of $3.296bn, down 14% on the same period last year and 1% below Ord Minnett’s forecast. A fully franked interim dividend of 94cps was declared.

 

The result completed a disappointing major bank reporting season that highlighted ongoing challenges on remediation costs, fee pressures, the impact of elevated competition on net interest margins (NIM), and slowing loan growth. Westpac’s trends were a little different than peers, however, with a better retail banking performance but poor treasury and insurance income, and underperformance in its Business Bank.

 

We note the following key points:

 

  • Cost growth was better than we had expected, with net write-backs in non-lending losses.

     

  • Bad and doubtful debts were much lower than we had forecast, improving to 9bp of gross loans and acceptances, although asset quality metrics appeared more negative.

     

  • Westpac missed our 1H19 non-interest income forecast by a material 7%. Most of this reflected higher general insurance claims costs, as well as further pressure on fees and commission income. Claims costs are likely to normalise lower, although we expect continued reduction in fees as well as wealth-related income. Treasury income also disappointed.

     

  • In the Business Bank, core earnings were flat despite mortgage repricing, with a decline in loan balances and a falling deposit-to-loan ratio. The performance of BT Financial Group was a more material negative, however, with elevated claims costs and the impact from efforts to reset the business.

     

  • The Consumer Bank performed relatively well. NIM expanded on mortgage repricing and we noted better deposit management than last half.

     

  • Westpac’s capital position was below our estimate, with its common equity tier-1 ratio up just 1bp half-on-half to 10.64%, reflecting the impact of one-off items.

Improving bank bill swap to overnight indexed swap rates should provide a fairly immediate tailwind for Westpac in the second half. Despite this, however, we see subdued trends continuing for the bank in the medium term, with only modest action on cost savings versus its peers.

 

Following the result, our cash net profit forecasts reduced by 2.4% in FY19, 2.7% in FY20, and 3.3% in FY21, with the return on equity falling to about 12% in FY21. We maintain our Hold recommendation and have trimmed our target price to $27.40 from $27.90.

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