Australia | Oct 24 2019
Brokers flag heightened potential for Westpac Bank to cut its dividend and/or underwrite its dividend reinvestment plan after more remediation provisions were announced.
-Performance in the near term likely to be hampered, given retail bank weighting
-Cash profit forecasts reduced further for FY19
-Brokers suspect cut to dividend and underwritten DRP likely
By Eva Brocklehurst
The updating of remediation provisions by Australia's major banks rolls on relentlessly and Westpac Banking Corp ((WBC)) is the latest to announce additional reparations.
The bank expects second half cash earnings will be reduced by -$377m because of customer remediation and the re-setting of wealth management. Of the customer remediation charges of $341m, 72% relates to customer payments with the balance for program costs.
Half of the costs are related to advice with another third from business banking and the remainder from the consumer area and New Zealand. This latest revelation brings the total remediation to $1.6bn in FY19 and compares with $1bn for ANZ Bank ((ANZ)) and $1.9bn for National Australia Bank ((NAB)).
Ord Minnett was not surprised at Westpac's announcement, given similar moves by the other two over the past few weeks, and reduces estimates for earnings per share in FY19 by -5%. The broker has become increasingly concerned about the sustainability of returns in retail banking, a sector to which Westpac is heavily exposed.
Hence, the mix on the bank's book is likely to hamper its performance over the near term and, while Westpac offers a well-balanced portfolio of businesses across the divisions, the hurdles are likely to weigh on the growth outlook. Ord Minnett is less optimistic about the bank's ability to take out costs versus its peers. In this vein Citi, too, suspects Westpac has lost momentum on mortgages.
While Westpac has outperformed its peers over the year to date the increased remediation signals to Citi the outlook has become more challenging. Capital now appears tight and the broker downgrades to Neutral from Buy.
Macquarie suggests, while the market has generally looked through the remediation activity in FY19, the aggregate cost to shareholders is becoming material. Commonwealth Bank ((CBA)) is now the last of the four major banks to top up its provisions and would require an additional $200-250m to match peer provisioning levels, although Macquarie believes this would not be significant, given that bank's surplus capital position.
Lower Dividend/Capital Raising?
All else being equal, Morgan Stanley reduces cash profit forecast by -6.5% for the second half and -3.5% for FY19 overall. The charges lower Westpac's CET1 ratio by -9 basis points and imply a pro forma FY19 CET1 ratio of 10.4% based on the broker's estimates.
Morgan Stanley forecasts a partial underwriting of the dividend reinvestment plan (DRP) to raise $2bn in capital when the bank reports on November 4 and expects a "satisfactory result". The final dividend is also expected to be reduced by -15% to $0.80, which would imply an FY20 pay-out ratio of around 75%. Macquarie also suspects an underwritten DRP will eventuate.
Ord Minnett had assumed the dividend would not be reduced, based on Westpac prioritising the distribution of franking credits to shareholders. With this new set of remediation provisions and the likelihood of more, the broker now assumes the final dividend will be reduced to $0.85 per share.
The broker also assumes Westpac partially underwrites the DRP to raise $2bn in capital, which means FY20 and FY21 forecasts are reduced by less than -1%.
Credit Suisse increases its estimates for a capital raising via the DRP to $3bn from $2bn, in order to improve the strength of the balance sheet, and accommodate regulatory changes as well as participation in an improving housing market. The broker forecasts a $0.10 reduction in the final dividend, enabling a CET1 ratio forecast of 11%.
The bank also provided an update on the contingent liability relating to an investigation by AUSTRAC (Australian Transaction Reports And Analysis Centre) which Shaw and Partners, not one of the seven monitored daily on the FNArena database, suggests is unlikely to be a cheap resolution. The broker has a Buy rating and $29 target.
Westpac reported its failure to divulge a large number of international funds transfer instructions in 2018. Ord Minnett suspects the likelihood of a fine has increased but points out it remains too early for Westpac to estimate the cost, while Credit Suisse now includes a $300m expense in FY20 in relation to the AUSTRAC matter.
FNArena's database has two Buy, four Hold and one Sell (UBS, yet to comment on the update). The consensus target is $29.06, suggesting 0.5% upside to the last share price. The dividend yield on FY19 and FY20 forecasts is 6.2% and 6.0% respectively.
Disclaimer: The writer has shares in the company.
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