The Westpac Banking Corp (ASX: WBC) annual result has divided ASX analysts on the bank's future. On one hand, the stockbroker, Morgans, is optimistic on the Westpac share price and retains a 'buy' recommendation. On the other hand, Bell Financial Group Ltd (ASX: BFG) head of research, TS Lim, believes Westpac "possibly came close to having a near-death experience in fiscal 2020". However, most analysts have maintained a 'buy' on the Westpac share price. This includes UBS Group AG (NYSE: UBS) who reiterated it as a 'buy' with a $20.50 price target, after the bank announced what some would call a multi-year turnaround report card.
Testing the Westpac share price
While the bank has announced a multi-year turnaround plan, there are a number of headwinds it is working against. For instance, The Australian explains how the further reduction in the cash rate by the Reserve Bank of Australia to 0.1% reduces revenues. Meanwhile, non-bank lenders are providing further competition to the bank's core mortgage and commercial lending business.
Morgans also noted the average increase of full time employees (FTE) by 8% between the first and second half of FY20. Although, it does expect the FTE number to reduce as customers come off COVID support. Furthermore, Westpac CEO, Peter King, explained that mortgage processing issues emerged due to the pandemic in India and the Philippines, thus resulting in some duplication of work. He further announced during the results webcast that jobs would be brought back into Australia, reducing the overall headcount and increasing efficiency.
Small business lending is another looming issue for the bank. Mr King noted that there had been a high non-response rate as the 6 month deferral period is coming to an end. He further commented:
"On small business, we're at the end of the six-month period. A lot of people are indicating they're going to commence repayments, but I do want to see it."
Turning around the battleship
During the presentation, Westpac CFO, Michael Rowland, highlighted the negative growth in mortgages over both halves of FY20. According to Mr Rowland, in the second half of FY20, this was largely attributable to the issues in offshore call centres, along with the pandemic's impact on demand. However, these reasons do not explain the fall during the first half of FY20. Mr King said:
"Mortgage growth has been a problem for us this year, we have not kept up with the market."
Mr King and Mr Rowland, both acknowledged the effort it would take to improve the mortgage business. As part of its multi-year turnaround plan, the bank has dedicated much spending to fixing and simplifying IT infrastructure and people. In IT, the company plans to replace human steps by using digital and data.
In addition, there was an admission of poor processes contributing to the fall in mortgage growth. Indeed, this was also a recommendation from the Hayne Royal Commission into financial services. In December 2019, Westpac's then CEO, Brian Hartzer, resigned. This came after AUSTRAC applied to the Federal Court for civil penalty orders against Westpac for deficient oversight of its anti-money laundering and terrorism financing obligations.
At the time, the Westpac share price was trading at $27.17 per share. Today, at the time of writing, it is asking $17.38.
Further improvements
As part of the company's broad sweep, Mr King announced a range of additional measures. For instance, the bank would be simplifying the products and services offered in an attempt to reduce complexity. In addition, the company has decided to exit non-core businesses as well as introducing an end-to-end "line of business" service model to increase accountability.
The bank is targeting mortgage growth in line with major banks by the second half of FY21. However, while the remainder of the big four banks are spending on growth, Mr King has to devote 47% of his $1.7 billion investment bill to fixing issues of risk and compliance.
The light on the horizon
One issue that Morgans dwelt on, as did both Mr King and Mr Rowland, was the CET1 ratio. This measures a bank's capital against its assets. Westpac has worked during the year to bring this to 11.2%, which Morgans believes is a strong pro-forma ratio.
In addition, the bank has already seen strong growth in customer deposits. Mr Rowland also spoke of an increasing rate of home loan applications, but was not yet ready to call it a positive trend. Importantly, Westpac said it had $16.6 billion in Australian home loans on repayment pauses at 28 October, reflecting 41,000 accounts. That was down from $54.7 billion at the height of the pandemic.
Morgans, UBS, Bell Potter and others have maintained a 'buy' on the Westpac share price despite the troubled year it's had, and its multi-year turnaround plan.
