Westpac reports very healthy numbers

<p>Westpac’s cash earnings  of $6.6bn are actually ahead of market expectations of around $6.4bn, the dividend is in line and overall the earnings number looks […]</p>

Westpac’s cash earnings  of $6.6bn are actually ahead of market expectations of around $6.4bn, the dividend is in line and overall the earnings number looks world apart from that of National Australia Bank last week, literally. The earnings beat might not look too significant on face value but when taken in the overall context of what’s been a very challenging year for the financial system globally, we think the outcome is excellent. Many doubted the ability of Australian banks to grow earnings, yet alone beat expectations this time last year. Not only has Westpac managed to turnaround form an ordinary first half result, it also has navigated the challenges brought to it in the second half. For margins to be down only 5 basis points shows that its pricing model has been very effective.

Our focus is again like all other banks on arrears. Impairments continue to trend lower, as do arrears. Mortgages in arrears by more than 90 days are now at 0.51% compared to 0.59% in March last year.  At no point did Westpac’s mortgage arrears exceed anywhere above this range in the past 18 months. Even if we take the riskier type of loans, like consumer loans, arrears were at 1.11% compared to 1.34% in March last year. As the RBA contemplates more rate cuts tomorrow, this trend should continue to decline which makes the Australian banking environment among the envy of the world.

Arrears are important because they signal bad debt charges, which this year totaled $1.21bn for Westpac. The number should be lower next year, contrary to comments from listed competitors, when taking Westpac’s own set of data. Cost control will become more important in 2013 and unfortunately this probably means Westpac will further reduce its staff base. Total reported full time equivalent employees were 2037 below the same period reported last year.

Bottom line: Westpac is doing everything it can to grow its earnings, in light of the circumstances brought upon it. The result doesn’t  blow the lights out, but it doesn’t need to either. We’re not talking about an emerging bank in Australia, we’re talking about one of the largest financial institutions in the region bedding down the hatches and performing well in a very challenging environment. For cash earnings to grow by 5% when housing growth trends towards 3% is testament to a very well managed bank. Growth in this order while maintaining asset quality over the next few years looks achievable and the market will start to reward this consistency by closing the multiple gap between Westpac and Commonwealth Bank. ANZ and Westpac are out preferred exposures.


Build your confidence risk free
Join our live webinars for the latest analysis and trading ideas. Register now

StoneX Financial Ltd (trading as “City Index”) is an execution-only service provider. This material, whether or not it states any opinions, is for general information purposes only and it does not take into account your personal circumstances or objectives. This material has been prepared using the thoughts and opinions of the author and these may change. However, City Index does not plan to provide further updates to any material once published and it is not under any obligation to keep this material up to date. This material is short term in nature and may only relate to facts and circumstances existing at a specific time or day. Nothing in this material is (or should be considered to be) financial, investment, legal, tax or other advice and no reliance should be placed on it.

No opinion given in this material constitutes a recommendation by City Index or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although City Index is not specifically prevented from dealing before providing this material, City Index does not seek to take advantage of the material prior to its dissemination. This material is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.

For further details see our full non-independent research disclaimer and quarterly summary.