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Westpac Ltd (ASX: WBC) is one of the largest publicly listed banks in Australia. Westpac has a market capitalisation of around A$83 billion.
What are the key features of Westpac’s FY21 profit report?
Westpac’s cash earnings (the preferred measure of profitability) for FY21 totalled $5.4 billion, up 105%. This strong growth in cash earnings was driven by a large turnaround in the impairment charge from a charge of $3.2 billion in FY20 to a benefit of $0.6 billion for FY21. This reflects the large impairment charge in FY20 due to expected losses arising from the economic contradiction caused COVID-19. However, this impact has turned out to be much lower than expected resulting in a significant write back in FY21.
Notwithstanding strong growth in cash earnings, the performance of the banking business was poor for two main reasons. First, costs (ex-notable items) rose 9% in the second half of 2021 compared with the first half of 2021 driven by a combination of higher operating expenses, increased recurring investment spend and increased spending relating to risk management and compliance. Second, the net interest margin (ex-notable items) declined by 9 basis points (bps) to 1.98% in the second half of 2021, heavily weighed upon by asset spread compression of 11bps. Management attributed this to largely meeting the market on price.
Westpac’s Tier 1 capital ratio is 12.2% at 30 September 2021 (up 119 basis points on 30 September 2020) and is comfortably ahead APRA’s benchmark of 10.5%. The increase reflects the sale of non-core businesses and increases in cash earnings.
What is Westpac returning to shareholders?
Westpac announced a final dividend of 60 cents per share (fully franked). This makes total dividends for FY21 of 118 cents per share compared with 31 cents per share for FY20 (which was impacted by the reaction to the COVID-19 economic shock). The dividend payout ratio for FY21 is 62 per cent of cash earnings.
In addition, Westpac will conduct an off-market buy-back of up to $3.5 billion of Westpac shares. The buy-back will be conducted by way of an off-market tender process which will open on 17 November 2021 and close on 17 December 2021. The buy-back price will comprise a capital component of $11.34 per share, with the remainder of the buy-back price deemed to be a fully franked dividend.
What is the outlook for Westpac?
Westpac did not provide any specific guidance for FY22. However, Westpac presented plans to reduce its underlying cost base from $9.1 billion in FY21 to $8.0 billion in FY24 through simplifying and streamlining its business processes.
What is the market reaction?
The market reaction to Westpac’s FY21 result was very negative with its share price falling around 10%. In particular, the market reacted negatively to rising costs and the contraction in the net interest margin. In addition, the market considers that Westpac’s FY24 cost reduction target is ambitious and is unlikely to be met. Westpac is currently trading at around $22.50 (ex-dividend). Westpac’s trades on a forward P/E ratio in the mid-teens and a dividend yield of around 5% (fully franked).
Disclaimer:
This article has been prepared by the Australian Stock Report Pty Ltd (AFSL: 301 682. ABN: 94 106 863 978)
(“ASR”). ASR is part of Amalgamated Australian Investment Group Limited (AAIG) (ABN: 81 140 208 288 Level 13, 130 Pitt Street, Sydney NSW 2000).
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