Westpac (ASX : WBC) has largely tracked sideways since their recent release of half year annual results. Net profit at the lender was down 19%, with remediation and restructuring items driving the change. After the result, Westpac has a payout ratio of 98%, indicating that it hardly has any profits to re-invest in the company.
Westpac has barely moved over the past 12 years (Credit: AFN Daily)
This has caused fears of a dividend cut in the market, with UBS and Deutsche Bank producing bearish dividend forecasts that are weighing on the share price. NAB has already cut its dividends and both ANZ and CBA will struggle to maintain their dividend payouts in the absence of profit growth. To make matters worse, NIMs (net interest margins) are declining, meaning that profitability across the sector is at some of the lowest levels on record.
Low NIMs also make profits across the sector more volatile, which contributed to Westpac still posting a profit decline of 22% in a strong economy. While it was mainly remediation charges driving the change, low profitability increases the vulnerability of the sector. We anticipate increased earnings volatility and reduced dividend stability across all of the big four banks, not just Westpac, relative to the last two to three decades.
Westpac was one of the least effected banks from the Royal Commission but is still making changes to their underlying business. The business is going to exit the wealth advice business, while trying to address customer issues that came to light in the royal commission. Westpac is also growing its digital sales and aims to be the leader in fintech. They have established several partnerships with companies like Zip and have invested $150m into an advanced fintech platform. The company has not achieved meaningful earnings growth for a long time, so it remains to be seen whether they will be able to execute going forward.
This article has been prepared by the Australian Stock Report Pty Ltd (AFSL: 301 682. ABN: 94 106 863 978)
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