Westpac Banking Corporation: Expect outperformance vs CBA to continue
About the author:
- Author name:
- By Azib Khan
- Job title:
- Senior Analyst
- Date posted:
- 17 February 2021, 12:00 PM
- Sectors Covered:
- Westpac Banking Corporation's (ASC:WBC) unaudited cash earnings of $1.971bn for 1Q21, on a run-rate basis, are 23% better than our expectation and ~43% better than FactSet consensus.
- We had been pointing out the upside risk of potential provision releases and this has crystallised in the case of WBC. We expect positive revisions to consensus on the credit impairment charge front and net interest margin front. We see strong capital management potential for WBC particularly given that WBC had the highest surplus franking credits balance of the major banks as at end-FY20.
- WBC remains our preferred major bank, and we particularly expect the outperformance against Commonwealth Bank of Australia (ASX:CBA) to continue.
Provision release the key highlight
The cash earnings beat is largely the result of an impairment benefit of $501m in 1Q21 due to provision release. The expected credit loss (ECL) provision has declined from $6.159bn at Sep-20 to $5.530bn at Dec-20.
There were no new large individually assessed provisions in the quarter. Credit quality metrics generally improved over the quarter with metrics for almost all industry segments improving.
Net interest margin also a positive standout
WBC has reported a net interest margin (NIM) of 2.06% for 1Q21, up 3bps from 2H20. An improved contribution from Treasury accounted for 1bp of this NIM expansion.
The remainder of the NIM expansion was courtesy of lower funding costs and higher deposit spreads. We have increased our NIM forecast for FY21 by 1bp, however we expect a more significant positive revision to the consensus NIM forecast for FY21.
Capital management potential
Stronger-than-expected earnings for 1Q21 combined with a reduction in credit risk weighted assets due to improved credit quality has resulted in a stronger-than-expected CET1 ratio of 11.9% as at 31/12/20.
The pro-forma CET1 ratio as at 31/12/20 (including the expected benefit from the sale of Westpac General Insurance and Westpac Pacific) was 12.0%. Similar to what was seen in CBA’s result last week, we expect WBC to revise the central estimate for the adverse impact on the CET1 ratio from CRWA migration to be nil when it reports its 1H21 result.
We have consequently favourably revised our CRWA forecasts and we are now forecasting a 12.3% CET1 ratio at end-FY23F.
We are forecasting WBC to have surplus CET1 capital (above APRA’s ‘unquestionably strong’ benchmark of 10.5%) of almost $7bn at end-1H21F. This creates strong potential for capital management particularly given that WBC had the largest surplus franking credits balance ($3.45bn) of the major banks as at end-FY20F.
Whilst we see potential for restructuring charges to be announced as part of the cost reset program that WBC has flagged it will lay out alongside its 1H21 results release, we expect the CET1 ratio to remain strong with potential for more divestments to further bolster the CET1 ratio.
Investment view and changes to forecasts
We have increased our FY21F cash EPS by 6.9% with no material changes to cash EPS for outer years. We retain an Add recommendation. Our target price, based on our DDM valuation, has increased from $25.50 (login to view).
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