Headwinds Continue To Buffet Westpac

Australia | May 07 2019

Pressure on margins, slowing loan growth and significant remediation charges are likely to colour the outlook for Westpac for some time.

-More resilient retail banking division versus other major banks
-Well-placed in recognising wealth management advice remediation ahead of peers
-High likelihood dividend will be reassessed in FY20


By Eva Brocklehurst

With the last major bank financial report for May, Westpac Banking Corp ((WBC)) revealed slightly different trends versus its peers. Retail banking was more positive, while treasury, insurance and business banking underperformed the sector.

The bank had previously flagged significant remediation charges and restructuring and this is expected to colour the performance of the stock over the next year, as well as the pressures on net interest margins and slowing loan growth.

The bank accumulated $1.1bn in remediation and restructuring charges in the half, while income was also affected by $130m of lower-quality items. Revenue and expenses, excluding large items, were broadly flat. Underlying earnings declined by -1.5%, despite mortgage re-pricing benefits. On a positive note the bank retained cost guidance, targeting a -1% reduction on the FY18 cost base. 

Morgans assesses retail banking in Australia has had a difficult operating environment and, given the backdrop, remains pleased with the performance of Westpac's consumer bank division. Cash earnings for this division were down -0.5% half on half.

As the consumer business held up, the broker believes the relative weakness in Westpac's share price is not justified. The bank has reiterated its target of $400m in productivity savings in FY19. Morgans continues to believe cost reductions are a source of underlying earnings upside for the whole sector.

Unlike ANZ Bank ((ANZ)) and National Australia Bank ((NAB)), where results were dragged down by retail divisions, Westpac showed some resilience, which Ord Minnett suggests was aided by mortgage re-pricing and good deposit management.

On the other hand, the business bank was more problematic, as earnings were flat. BT Financial Group was also a material negative, with elevated claims costs and the impact from efforts to re-set the business.

Macquarie believes Westpac's overweight position in Australian mortgages does not bode well for the near-term earnings growth outlook, expecting underlying income and expenses growth of just 1% in the second half. Citi takes a different view, believing Westpac is better placed than its peers because it has recognised wealth management advice remediation ahead of the other major banks.

Westpac is also exiting wealth management advice and should emerge as an online platform which can be competitive without the legacy of major bank peers. Still, Citi acknowledges disappointment with insurance income and treasury revenue.


Westpac has enjoyed the mortgage boom more than most, Deutsche Bank points out, and the interest-only book has dropped to around 31%, having been up at 50% in the first half of FY17. Yet, Macquarie counters, it remains 5-13% above peers. Over the same period, mortgage loan growth has slowed to 1% from 8% and margins have dropped 20 basis points to 2.20%.

Deutsche Bank agrees with Westpac's commentary that a further easing in house prices is likely. The bank suspects credit quality is unlikely to improve and system housing growth will slow to 3% in the current year, falling next year to 2.5%. Deutsche Bank is more bearish, expecting a decline of -1% in mortgages and bad debts approaching risk levels in FY20 as the housing cycle unfurls.

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