The Westpac Banking Corp (ASX: WBC) share price will be on watch on Monday morning after the banking giant released a strong half-year result.
For the six-months ending March 31 Westpac achieved a statutory net profit of $4,198 million and cash earnings of $4,251 million. This was a 7% and 6% increase, respectively, on the prior corresponding period.
The cash earnings figure was also ahead of the market's expectations. Bloomberg's consensus estimate was for cash earnings of $2,500 million for the first-half of FY 2018.
On a per share basis cash earnings came in at 125 cents, up 4% on the prior corresponding period. Despite the rise in cash earnings, the bank opted to keep its interim fully franked dividend steady at 94 cents per share. The market had been looking for a 95 cents per share dividend.
Westpac finished the period with a cash return on equity of 14%, which is at the top end of its target range of 13% to 14%, and a common equity tier 1 capital ratio of 10.5%, which is in line with APRA's unquestionably strong benchmark. Both of these metrics were ahead of expectations and are likely to be looked kindly on during trade today, in my opinion.
Its net interest margin rose 7 basis points to 2.17%.
What drove the solid result?
The bank's Consumer Bank division was arguably the star performer during the period with a 12% increase in cash earnings to $1,717 million. Management advised that this was driven by solid balance sheet growth (loans up 5%, deposits up 5%), disciplined margin management, and reduced impairment charges.
The bank's Business Bank division also performed well, growing cash earnings by 13% over the corresponding period to $1,080 million. Management put this down to core earnings growth of 7% (loans to small and medium enterprises up 5%, 6% rise in deposits) and a 32% decline in impairment charges.
Supporting this growth were the bank's BT Financial Group and Westpac NZ businesses which grew cash earnings by 7% and 4% respectively, over the prior corresponding period.
This managed to offset the weak performance of the Westpac Institutional Bank division which posted a 12% decline in cash earnings to $551 million. Management placed the blame on a strong market performance in the prior corresponding period which was not repeated.
Should you invest?
I think Westpac would be a great investment option for investors that don't already have meaningful exposure to the banks.
Today's result was a strong one and gives me confidence that the sector can continue to grow despite a cooling housing market.
Based on this result, I would pick Westpac ahead of rivals National Australia Bank Ltd. (ASX: NAB) and Australia and New Zealand Banking Group (ASX: ANZ).
