Westpac Banking Corp: Model update for fraud and further asset sale

About the author:

Azib Khan
Author name:
By Azib Khan
Job title:
Senior Analyst
Date posted:
09 July 2021, 9:00 AM
Sectors Covered:
Banks

  • We update our forecasts for the provision we expect to be raised by Westpac Banking Corp (ASX:WBC) in respect of its exposure to Forum Finance Pty Ltd. We have also updated our forecasts for the announced sale of the NZ life insurance business.
  • Our FY21F cash EPS is reduced by 2%, and no material changes have been made to outer years. Retain Add recommendation.
  • Target price of (login to view) is unchanged.

Expecting credit impairment charge in respect of Forum Finance exposure

Westpac Banking Corp (ASX:WBC) announced late last week that it has commenced proceedings in the Federal Court of Australia against Forum Finance Pty Ltd, following the discovery of a significant potential fraud. The potential fraud relates to a portfolio of equipment leases with Westpac customers arranged by Forum Finance, which were referred to Westpac’s Institutional Bank.

WBC has said that, at this stage, it appears that no WBC customer has suffered a financial loss.

WBC has also said that it has a potential exposure of ~$200m after tax to Forum Finance, with the extent of any loss dependent on the outcome of its investigations and recovery actions underway. WBC has obtained certain asset freezing and search orders to preserve available assets and relevant information.

We understand that the recovery process may play out over a prolonged period, and we therefore expect WBC to raise an individually assessed provision of ~$290m for the full exposure to Forum Finance in 2H21F. However, we see potential for this provision to be partially written back over time.

Modest impact on CET1 ratio to be offset by sale of NZ life business

We expect the ~$200m post-tax impact of this provision on FY21F earnings to adversely impact the CET1 ratio by ~5bps.

However, earlier this week WBC announced the sale of its New Zealand life insurance business to Fidelity Life Assurance Company Limited for a sale price of NZ$400m. This is expected to result in a post-tax gain on sale and add ~7bps to WBC’s CET1 ratio, thus more than offsetting the CET1 impact associated with the Forum Finance exposure. Our forecast CET1 ratios now reflect the announced sale of the NZ life insurance business.

We are forecasting WBC to have ~$8bn of surplus CET1 capital by end-FY22F – equating to ~$2.18 of surplus CET1 capital per share – before allowing for the potential sale of the Australian life insurance business and Panorama platform business. This quantum of surplus capital, together with WBC’s large franking credit balance, makes the capital management potential for WBC exciting in our view.

Investment view and changes to forecasts

We have reduced our FY21F cash EPS by 2% as a result of the higher credit impairment charge stemming from the Forum Finance exposure. We have not materially changed our cash EPS forecasts for the outer years.

We retain an Add recommendation. Our target price, based on our DDM valuation, is unchanged at (login to view). 

Further details of our investment view are contained in our report titled Underlying ROTEs show where value lies.

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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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