Westpac Banking Corp: Continue to expect $5bn buyback next month

About the author:

Azib Khan
Author name:
By Azib Khan
Job title:
Former Senior Analyst
Date posted:
18 October 2021, 9:00 AM
Sectors Covered:

  • Westpac Banking Corp (ASX:WBC) has announced that its reported net profit and cash earnings in 2H21 will be reduced by $1.3bn after tax due to notable items.
  • Our FY21F cash EPS is reduced by 21%, however we have not changed our cash EPS forecasts for outer years as we view the notable items to be non-recurring in nature.
  • We continue to expect a $5bn off-market share buyback to be announced on 1 November 2021 when WBC reports its FY21 result.
  • We are uncertain as to whether WBC will decide to exclude these notable items when determining the final dividend payout ratio. We are being conservative on this front and are assuming a final dividend payout ratio of 65% of 2H21 cash earnings (inclusive of notable items). Our final dividend forecast has consequently reduced from 54cps to 30cps.  

Details of notable items

The notable items (after tax) include: a $965m write-down of assets (goodwill, capitalised software and certain other assets) in Westpac Institutional Bank (WIB) following their annual impairment test; additional provisions for customer refunds, payments, associated costs and litigation provisions of $172m; previously announced separation and transaction costs along with a deferred tax asset write-off related to the agreed sale of Westpac Life Insurance Services Limited (WLIS) of $267m; and other costs associated with the divestment of the Group’s Specialist Businesses of $24m.  

Write-downs in WIB may be a sign of further RWA optimisation

WBC has said that as part of its annual impairment test, the valuation of the Westpac Institutional Bank (WIB) division did not support the carrying value of its assets (mostly intangibles).

WBC has said that this was partly due to reducing risk in the division through the exit of energy trading, consolidation of Asian operations and reducing correspondent banking relationships which have all impacted earnings. 

Whilst de-risking WIB has impacted earnings, it is our view that it has also resulted in risk weighted asset (RWA) optimisation within WIB. We had assumed in our forecasts that RWA optimisation is now largely complete, however, we now suspect that there are more optimisation benefits to come through. We have consequently, reduced our RWA forecasts.

Still forecasting $5bn off-market share buyback to be announced next month

Whilst the notable items serve to reduce WBC’s CET1 ratio by ~15bps, we have reduced our RWA forecasts as mentioned.

We continue to expect a $5bn off-market share buyback to be announced on 1 November 2021 when WBC reports its FY21 result.

Investment view and changes to forecasts

We have reduced our FY21F cash EPS by 21% as a result of the notable items. We have not changed our cash EPS forecasts for the outer years. ▪ Our target price, based on our DDM valuation, is unchanged at (login to view).

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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