Today, Westpac Banking Corp (ASX: WBC) kicked off a busy week of big bank profit announcements, delivering a slightly disappointing result for shareholders.
Despite revenue rising 2% when compared to the first half of financial year 2014 (1H14), Westpac's cash profit fell $92 million short of analysts' expectations and was $330 million below its 2014 second half result.
Whilst income from lending (net interest income) rose slightly, it was the bank's non-interest income which failed to deliver, with it falling 4%. Westpac said the decrease was a product of a change of valuation methodologies. Excluding these changes, cash profit would've increased 2% year over year.
10 things you need to know from today's report
- Statutory net profit was $3,609 million, flat year over year but down 8.4% from the prior half
- Cash earnings were $3,778 million, flat year over year but below analyst consensus forecasts of $3,870 million
- Revenue was 2% higher at $9,997 million
- An interim dividend of 93 cents per share, up 3%, will be paid
- Its common equity Tier 1 capital ratio fell 0.06% to 8.76%, which is at the lower end of its target range between 8.75% to 9.25%
- To increase its capital buffer, $2 billion of new shares will be issued under the dividend reinvestment plan (DRP), which is set at a discount of 1.5%
- Despite a falling capital buffer (which can reduce overall bank profitability) cash return on equity fell 0.67% to 15.81%
- Its cash net interest margin (NIM) was 2.05%, down from 2.11%
- Expense to income ratio was 42.5%, up from 41.2%
- The bank's outlook pointed to intense bank competition with modest but positive credit growth
Commentary
"Our operating divisions, particularly retail and business banking, have continued to perform well during the period," CEO Brian Hartzer said. "However, the headline result was impacted by derivative adjustments in our WIB business and a lower Treasury result."
Mr Hartzer also said during the period the bank grew household deposits at system (i.e. in line with the broader market) but fell below system in mortgage growth.
The group's finance business continues to grow strongly, following its decision to acquire Lloyd's Banking Group's Australian assets, whilst the New Zealand business achieved 2% cash earnings growth.
Looking ahead Mr Hartzer said, "While I'm positive about the outlook, the economy is currently in transition and this means that we expect growth to be uneven across different industry sectors and geographies… For Australian banks, this means that credit growth will be modest but positive with housing growing faster than business."
Despite the economic and regulatory uncertainty, stemming largely from the recent Financial System Inquiry and potential changes from the Basel Committee for Banking Supervision, Westpac continues to position itself strongly in key markets.
Should you buy, hold, or sell Westpac shares?
The outlook for Australia's banking sector isn't positive. Unfortunately this is not reflected in the current share prices of Westpac, Commonwealth Bank of Australia (ASX: CBA), National Australia Bank Ltd (ASX: NAB) or Australia and New Zealand Banking Group (ASX: ANZ).
For Westpac specifically (its shares are currently trading at 3.1x its tangible assets per share) the chances of sharemarket outperformance look slim.
