Westpac Banking Corporation (WBC) – Revenue lagging loan growth

Westpac Banking Corporation provides banking and other financial services in Australia, New Zealand, the Pacific Islands, Asia, the Americas, and Europe. The company was formerly known as Bank of New South Wales and changed its name to Westpac Banking Corporation in October 1982. Westpac was founded in 1817 and is headquartered in Sydney, Australia.

WestpacBanking Corp said its core net interest margin narrowed 4bp half-on-half (HoH) to 1.78% in the first half of FY26, driven by intense competition for home loan and institutional customers that squeezed lending spreads and as the timing of interest rate rises offset the benefits from higher rates. That weak outcome came despite overall loan volumes, especially in the institutional division, growing strongly. Cash earnings were pre-reported and the interim dividend was in line, but revenue missed consensus estimates, as a smaller contribution from markets and Treasury and reduced fee income weighed on non-interest income. Costs were a highlight, coming in 2% lower than market expectations, albeit largely due to seasonal factors, and Westpac has guided to increased costs in the second half as the bank lifts IT spending on the crucial UNITE project.

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Headline growth in Westpac’s business banking loans of 8% was robust, but the composition of this volume growth is underwhelming. Within the business banking division, institutional lending, i.e. to large corporates, soared 12%, strongly skewed to borrowers in the data centre, resources, infrastructure and energy generation sectors, while loans in the rest of the division, i.e. small- to medium-sized enterprises (SME), rose only 4%. The issue here is that the institutional loan growth, of which more than 2/3 went to borrowers with existing relationships with Westpac, is low-margin business.This is reflected in the institutional business reporting only a 2% rise in lending and deposit revenue even as its average interest-earnings assets (excluding markets) jumped 12% HoH, while the institutional NIM on an ex-markets basis contracted a steep 14bp HoH to 1.84%. Westpac’s common equity tier-one (CET1) ratio of 12.4% looks fine, albeit with the sharp increase in institutional loans classed as so-called low risk-weighted asset (RWA) density business, i.e.lower-risk lending as a proportion of total RWA, and further ‘data refinement’ via its internally generated Excel-based models, about which we are sceptical. Furthermore, the leverage ratio as defined by the Australian Prudential Regulation Authority (APRA), i.e. tier-one capital as a proportion of total committed exposure (TCE) has declined to just under 5% from as high as 5.5% in the September half of FY23.

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Post the result, we have cut our EPS estimates by 5.0% and 2.5% for FY26 and FY27, respectively, to incorporate narrower NIMs and higher costs as UNITE spending ramps up, while our FY28 forecast is bumped up 0.1%. We maintain our target price on Westpac and reiterate our Sell recommendation on valuation grounds, noting the bank faces challenges to convert its lending growth into meaningful revenue gains and has an increasing degree of execution risk the deeper it goes into the implementation phase of its UNITE program.

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