Bubble or not, banks are gonna go off today. Westpac’s result is out of the box, from Credit Suisse:
Event: WBC reported cash earnings of $3,525mn (up 10% on $3,195mn 1H12) which was 1% better than our $3,491mn estimate and 4% better than the $3,410mn consensus average. Interim DPS of $0.86 (up 5% on the $0.82 pcp) was in line with CS and the consensus, plus special DPS of $0.10. Refer detailed financials attached. Divisionally, cash earnings growth was broadly based, although BT and Westpac Retail & Business Bank relatively softer. Compositionally, a weaker-than-expected result with softer-than-expected outcomes on both revenue (albeit +2% growth sequentially was reasonable) and costs (+2% growth) more than offset by a very low bad debt charge (0.17%). Accordingly, a reasonable pre-provision profit growth outcome (+2% sequentially) was still 2% short of our expectations.
Investment Case: Strong headline result enhanced by a special dividend, should be well received for a stock on increasingly rich multiples; Strong capital ratios. What we liked about the result: Creditable net interest margin (+1bp sequentially); Improving returns (ROE, ROA); Improving asset quality. What we didn’t like: Very modest spot balance sheet growth (+1% sequentially) with non-housing flat; Declining collective provision coverage.
Valuation: WBC currently trades on 14.7x 12-month prospective earnings (7% premium to the major bank peer group vs. a 2% four-year average premium) and a corresponding book multiple of 2.3x.
If Australia goes over the mining investment cliff in a bad way, this special dividend is going to be seen as one of the great acts of short sighted banking. Who cares, buy!
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific's leading geo-politics and economics portal.
He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.
