Westpac Banking Corporation (WBC) News Update

Submitted by Jim Thesiger on 13 May, 2008 - 23:43

Westpac (WBC)stated that they are in a strong capital position and have no requirement for additional capital from stockmarket analyst Macquarie Research Equities.

Westpac Banking Corporation (WBC): Westpac Dividend Yield Play

It’s bank dividend season again, and WBC follows ANZ this year with a $0.70 fully franked dividend, going ex-div on Monday 19th May.

WBC and SGB have today announced a proposed all script merger via a scheme of arrangement. If successful, the proposal would see SGB shareholders receive 1.31 WBC shares for each SGB share held, valuing SGB at more than $18bn.

The combined entity would create the second largest company in the S&P/ ASX indicies, and would be the largest bank.

WBC’s 1H08 result was strong and in-line with expectations. It was characterised by 10% cash NPAT growth, 16% loan growth, better than expected margin decline but higher impairment costs. Westpac also categorically stated that they are in a strong capital position and have no requirement for additional capital

Source: IRESS Weekly Chart

Using warrants for Dividend Yield Plays (DYP’s), has long been a favourite strategy for warrant investors. It allows investors to utilise the leverage available through warrants to potentially increase their dividend yield to potentially above the level possible using the underlying.

Full details of how to implement DYP’s and things to be aware of can be found on the ASX website below;


Westpac Banking Corporation (WBC) Fundamental Analysis

Macquarie Research Equities (MRE) Fundamental View:

Westpac announced today that they had approached St. George to propose a ‘merger’ which would see SGB shareholders receive 1.31 WBC shares for each SGB share held.

The deal looks to be <1% EPS dilutive for WBC in FY08, EPS neutral in FY09 and 3-5% accretive thereafter. WBC could pay almost $33 before reversing FY09 accretion.

There is potential for additional EPS accretion to be generated by the release of almost $3.0bn of surplus capital at the merged group, including $600 - $800m of capital relief for SGB relating to Basel II transition benefits under WBC’s Advanced accreditation.

With pro-forma FY09 cash NPAT of $5.5bn, total assets of almost $600bn and
potential market value of more than $65bn, the new entity would be Australia’s largest domestic lender, largest listed bank by market capitalisation, and second largest by assets (behind NAB).

MRE highlights 2 hurdles to the deal;

Firstly, the deal would require regulatory approval from both the ACCC and the Federal Treasurer. Whilst MRE don’t see material competitive issues for this merger, competition in the banking sector is highly sensitive and thus the risk remains. Competition issues will be particularly pertinent in NSW given both banks large exposure to that State.

Secondly, there exists the possibility of a counter-offer. MRE believe WBC is the best fit for SGB based on management fit and financial impact. WBC would gain the most EPS benefit from buying SGB, followed by CBA. However, the deal looks to be EPS dilutive for NAB and ANZ for up to 4 years.

Underlying View

In the current environment of economic uncertainty and on-going credit market risks WBC remains MRE’s preferred banking exposure on the basis of it’s lower risk business and strong Treasury group yielding better returns for investors.