Westpac: Addressing capital concerns

About the author:

Author name:

By Richard Coles

Job title:

Senior Analyst

Date posted:

15 October 2015, 10:37 AM

Sectors Covered:

Insurance, Diversified Financials

• Westpac (WBC) launched a A$3.5bn capital raising yesterday that will lift its pro-forma CET1 ratio to around 9.4% (target range 8.75% - 9.25%).
• The bank also released its preliminary FY15 result with a cash NPAT of A$7,820m, broadly in-line with Bloomberg consensus.
• Positive for the overall banking sector, WBC also said it will reprice its variable home loan (owner occupied) and residential property loans by 20bps due to higher mortgage capital requirements.

Capital raising addresses capital shortfall

WBC announced it will raise A$3.5bn in capital through a 1 for 20 pro-rata accelerated renounceable entitlement offer. The raising will lift WBC’s CET1 by 100bps to c9.4%, moving this measure inside management's target range (8.75%-9.25%) on a pro-forma basis. The raising is priced at A$25.50, a c13% discount to WBC's October 13 dividend adjusted closing price (A$29.50) and TERP. With WBC trading on 11.9x, below its historical average PE of 12.3x, the raising appears far more attractive for shareholders than the recent ANZ and CBA raisings, in our view.

Result broadly in-line

In conjunction with the raising, WBC released its preliminary FY15 result. WBC’s cash NPAT of A$7,820m is c1% above consensus and broadly in-line with Morgans' estimate. The final dividend of 94 cps equates to a c75% payout ratio. Overall, WBC’s FY15 result was characterised by strong Australian banking (Westpac and St George) and NZ performances, offset by a weaker institutional result. Positively, asset quality improved with stressed assets declining and we viewed WBC’s stable margin (2.08%) as a solid outcome versus the 5bps decline seen by CBA over FY15.

Repricing mortgages

WBC declared it will reprice both its variable home loan (owner occupied) and residential investment property loan rates by c20bps reflecting higher mortgage capital requirements. We estimate this repricing will lift WBC’s net interest income by cA$439m and NPAT by c4%. We expect the other major banks to follow suit and think this repricing shows the majors will be active in trying to protect returns going forward.

Investment view – maintain Add recommendation

We recently moved WBC to an Add recommendation. With the recent pull back in WBC’s share price, we believe the stock now offers better value trading on an FY15F PE of 11.9x and a dividend yield of c6%. We believe today’s raising also addresses recent WBC capital concerns.

Further, we continue to believe WBC has the greatest longer-term cost-out opportunity in the sector, which we think will become more important as the market gets more competitive.

We lower our FY16/FY17 EPS forecasts by c3% and c5% as we factor in the capital raising. Our price target is lowered 3% - Morgans clients should login to view.

More information

Morgans clients can access further detailed analysis on Westpac. If you are interested in finding out more, please contact your nearest Morgans office.

Disclaimer: The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.