Westpac Banking Corp: Expecting capital management in November

About the author:

Azib Khan
Author name:
By Azib Khan
Job title:
Former Senior Analyst
Date posted:
18 August 2021, 12:00 PM
Sectors Covered:

  • WBC has provided an update on capital, funding and asset quality alongside the release of its Pillar 3 report. This is not a trading update, meaning that no P&L figures have been provided for the Jun-21 quarter.
  • We are forecasting $8bn of off-market share buybacks over FY22F and FY23F. We expect the commencement of these buybacks to be announced alongside the FY21 result release on 1 November 2021.
  • Australian mortgages and Australian business lending grew at 1x system in 3Q21.
  • NIM and expense guidance have been reiterated.
  • Retain Add recommendation.

Forecasting $8bn of off-market share buybacks over FY22F and FY23F

We have been flagging attractive capital management potential for WBC, and the Group has today said that “given excess capital and franking credits, the Board will consider a return of capital, with an update expected at our FY21 results”. We are now forecasting a $5bn off-market share buyback to be conducted in 1H22F and a further $3bn off-market share buyback to be conducted in 1H23F.

We again point out that the Superannuation, Platforms and Investments business (which most notably includes the Panorama business) is yet to be sold. This business delivered cash earnings of $105m in 1H21 and $167m in FY20. We see potential for the sale of this business to add over $2bn to WBC’s surplus CET1 capital position and this creates upside risk to our capital management forecasts.

NIM and expense guidance reiterated

WBC has reiterated that the NIM for 2H21 is expected to be lower than 1H21. Our 2H21 NIM forecast is unchanged at 2.06%. While some may find the reiteration of NIM contraction guidance to be disappointing at face value, to place this into context, WBC’s NIM increased from 2.03% in 2H20 to 2.09% in 1H21 with a large 6bps tailwind from customer deposit repricing.

We do not expect the extent of this deposit repricing tailwind to be repeated in 2H21. Also, after excluding notable items, the NIM for 1H21 was 2.07% (2bps lower than the headline NIM of 2.09%). Our 2H21 NIM forecast of 2.06% compares favourably with the 2H20 NIM of 2.04% after excluding notable items.

WBC has also reiterated expense guidance, being that FY21 expenses are expected to be higher than FY20 (excluding notable items). Again, this needs to be kept in context of WBC aiming to reduce its annual cost base to $8bn by FY24 compared with an underlying cost base of $10.2bn in FY20.

Credit quality not concerning

On the credit loss provisioning front, as expected, WBC has raised a $300m individually assessed provision in relation to the Forum Finance alleged fraud.

We calculate that the collective provision (CP) coverage of credit risk weighted assets has reduced from 1.42% at Mar-21 to 1.30% at Jun-21. The Group has said that the reduction in CP is the result of improved asset quality metrics and improved forward-looking economic inputs.

Investment view and changes to forecasts

We have not materially changed our FY21F cash EPS. Our cash EPS forecasts for FY22F/FY23F have increased by 4.9%/9.0% respectively largely due to us now forecasting off-market share buybacks.

Our target price, based on our DDM valuation, is unchanged at (login to view) is we were already reflecting capital management potential in our valuation.

We retain an Add recommendation

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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.

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