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

In line with our expectations, Westpac’s WBC 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.

We assume the bank can grow loans and deposits roughly in line with the market, without resorting to heavy discounting. The bank’s new mortgage origination platform has reportedly improved approval times and should provide a platform to lift broker satisfaction further. Home loans increased 3% in the second half, ahead of market growth of around 2.3%. Aided by modest revenue growth, we assume the cost/income ratio will improve to 46% by fiscal 2027. The current cost/income ratio of 49% still stands out as high among peers, and should improve as the bank reduces headcount, as customer remediation and risk and compliance projects complete, and as the benefits of technology investment are realized.

The final fully franked dividend of AUD 0.72 per share is as expected and takes full-year dividends up 14% to AUD 1.42, on a 69% payout ratio. We forecast modest dividend growth as the bank tweaks the payout ratio higher on lower earnings in fiscal 2024. We see headroom to do this given the strong capital position. A position so strong that despite uncertainty around future loan losses, Westpac is comfortable enough to announce an AUD 1.5 billion share buyback.