Westpac Earnings: The Bank Needs More Time to Catch the Pack on Costs

In line with our expectations, Westpac’s fiscal 2023 operating profit increased 26% to AUD 7.2 billion. Westpac has disappointed on numerous fronts in recent years, but we think the renewed momentum in home and business lending volumes, improved net interest margins, or NIM, and a lower cost/income ratio are encouraging signs things are heading in the right direction. Return on equity of 10%, up from just 8% last year, is much closer to the 11% returns we expect from the wide-moat major bank over the medium term. Inflationary cost pressures drive a modest downward revision to our short-term profit forecasts, but our long-term forecasts are largely unchanged. We retain our AUD 28 fair value estimate, and on a forward P/E of 11.3 times and a fully franked dividend yield of 6.6%, we continue to believe shares are cheap.