Westpac Banking Corporation (WBC) Update

Submitted by Jim Thesiger on 2 May, 2008 - 16:14

Westpac Banking Corporation (WBC) has a $24.55 share price target and an Outperform recommendation from Australian stock analyst Macquarie Research Equities.

Westpac Banking Corporation (WBC) Reasonable 1H08, with specific issues!

1H08 Cash NPAT flat (sequential), held back by BDD, tax rate low:

EPS down 1%. Revs and costs both up 4%. BDD charges up from 18bp to 29bp, mainly due to specifics. NPL's up sharply, from 40bp to 53bp, ($1,102m to $1,560m). Tax rate was 27.7% from 30.1%. Margins fell 9bp. Strong IEAg +12%. Fee income fell 2%. Best two divisions: Business & Consumer. Worst: Inst & BT.

Overall perspective on result:

Core result was creditable in a tough half. Margins were well managed and asset growth solid. Markets businesses performed well. Three things dragged on result (1) higher impaired assets and specific BDD charges (2) low tax rate hurt result quality (3) capital position is strong under B2, but forecasts highlight pressure.

Questions arising from our BDD and Capital analysis:

We are looking to clarify these issues in upcoming mgmt discussions. (1) Our "APRA stressed BDD" benchmarking analysis shows WBC to be a little riskier than market (and our) perceptions (2) explanation of sharp 1H08 NPL increase could have been more informative (3) WBC appears best capitalised at 7.38% T1, but we see downside risk from 2H08 RWA increases and write-offs.

Maintain Neutral. Under positive watch. WBC is a preferred play.

We examine what WBC could look like by 2017. In summary, we believe WBC has the potential to overtake CBA as the premium play in the banks. However, this shall require, in our view (1) significant work in the Retail bank, in customer centricity, revenues, costs, IT platforms and distribution (2) improving transaction and deposit gathering capabilities (3) closing the loop on market communication gaps. Our PT continues to be based on DCF, SOTP & Int'l Peers.