Westpac reports very healthy numbers

Westpac’s cash earnings of $6.6bn are actually ahead of market expectations of around $6.4bn, the dividend is in line and overall the earnings number looks world apart from that of National Australia Bank last week, literally. The earnings beat might not look too significant on face value but when taken in the overall context of what’s been a very challenging year for the financial system globally, we think the outcome is excellent. Many doubted the ability of Australian banks to grow earnings, yet alone beat expectations this time last year. Not only has Westpac managed to turnaround form an ordinary first half result, it also has navigated the challenges brought to it in the second half. For margins to be down only 5 basis points shows that its pricing model has been very effective.

Our focus is again like all other banks on arrears. Impairments continue to trend lower, as do arrears. Mortgages in arrears by more than 90 days are now at 0.51% compared to 0.59% in March last year. At no point did Westpac’s mortgage arrears exceed anywhere above this range in the past 18 months. Even if we take the riskier type of loans, like consumer loans, arrears were at 1.11% compared to 1.34% in March last year. As the RBA contemplates more rate cuts tomorrow, this trend should continue to decline which makes the Australian banking environment among the envy of the world.

Arrears are important because they signal bad debt charges, which this year totaled $1.21bn for Westpac. The number should be lower next year, contrary to comments from listed competitors, when taking Westpac’s own set of data. Cost control will become more important in 2013 and unfortunately this probably means Westpac will further reduce its staff base. Total reported full time equivalent employees were 2037 below the same period reported last year.

Bottom line: Westpac is doing everything it can to grow its earnings, in light of the circumstances brought upon it. The result doesn’t blow the lights out, but it doesn’t need to either. We’re not talking about an emerging bank in Australia, we’re talking about one of the largest financial institutions in the region bedding down the hatches and performing well in a very challenging environment. For cash earnings to grow by 5% when housing growth trends towards 3% is testament to a very well managed bank. Growth in this order while maintaining asset quality over the next few years looks achievable and the market will start to reward this consistency by closing the multiple gap between Westpac and Commonwealth Bank. ANZ and Westpac are out preferred exposures.

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