Westpac is one of the best-capitalized banks globally, allowing them to deliver excellent market-beating dividends to investors. As profits come soaring, Should I Buy Westpac Shares?
WBC ASX: Fast Facts
- Ticker Code: WBC
- Company: Westpac Banking Corp
- Sector: Financial: Bank
- Business: Banking Services
- Share Registry: Link Market Services
- Competitors: CBA, ANZ, NAB, MQG, BOQ
Westpac Shares Price
How much would I have made if I bought Westpac at the bottom of the COVID crash? At the very bottom of the COVID crash on the 23rd of March 2020, WBC shares were worth $13.47. Investors would have made 90.65% in capital gains since then. The last time WBC shares were at this price was in 2003, although we did see WBC within the $14 price range during the GFC in 2008.
Westpac’s 52-week range has been from $17.18-$27.12. Hence over the past twelve months, WBC’s market cap has ranged from $63 Billion to $99.5 Billion.
Westpac Shares Price Returns
From the past ten years, WBC shares have had a negative return over a calendar year five times, or 50%. Averaged over the past ten years, the average return over a calendar year has been 4.02%.
WBC ASX Market Capitilisation
Westpac is currently sitting as the third-largest bank by market capitalization, behind Commbank and NAB. This also makes it the fifth-largest company on the ASX. NAB recently overtook WBC, after stellar returns.
Should I Buy Westpac Shares: About
Westpac Banking Corporation is an Australian-based bank and financial institution established in 1817. Today the group has over 14 million customers and 40,000 employees. Westpac is a pillar Australian business, making up one of the county's big four banks. Westpac is a portmanteau of "Western Pacific"
Westpac was established as the merger and acquisition of a number of original government banks including the Bank of New South Wales, Western Australia Bank, and the Australian Bank of Commerce as well as many more. The Bank of New South Wales was IPOed in 1970 and later became Westpac in 1982.
WBC's Principal Activity: The provision of financial services including lending, deposit taking, payments services, investment portfolio management and advice, superannuation and funds management, insurance services, leasing finance, general finance, interest rate risk management, and foreign exchange services.
Westpac's Divisions: Today WBC group managers a number of key brands and divisions including Westpac, BankSA, Rams, St George, Bank of Melbourne, BT, BT Panorama, and Westpac New Zealand.
Westpac Portfolio Simplification: Largely encouraged by the Hayne Royal Commission into the banking sector, WBC along with the other big-four banks has begun to simplify its portfolio of businesses.
Westpac Dividend History
Dividends have been a big driving force for investors to flock to the banking sector and Westpac. Over the past decade Westpac Banking Corp WBC, has delivered below-market returns for investors, averaging just 3.16% per year. However, when we include its excellent dividends investors have actually enjoyed 15.29% per year.
Westpac has far outperformed the average market return of 11.9% in the past decade, thanks to its strong full-franked dividend.
Westpac typically announces a dividend with the release of its half-year results in May and full-year results in November as seen in their financial calendar. WBC Dividends are typically paid twice a year, in June (interim dividend) and December (final dividend).
WBC has paid biannual dividends every year since 1983. Except in 2020 during the COVID-19 recessionary period. In 2020 they only announced a final dividend. All dividends since 2000 have been fully franked. They also offer a Dividend Reinvestment Plan (DRP).
Whats is WBC's Dividend Policy? Based on past payouts, Westpac seems to target a dividend payout ratio of 80-85%.
Should I Buy Westpac Shares: Investor Sentiment
You may ask yourself, what do other investors think of Westpac shares? After surveying 154 Investors about their current WBC shares sentiment: BUY-HOLD SELL, as well as their target price over the next 12-months here are the results;
The results from this survey show there seems to be a strong bullish investor sentiment on WBC shares.
Should I Buy Westpac Shares: Fundamentals
|Volume 4W Avg||6,377,074|
|NTA per Share||$16.60|
Based on their current share price we can see WBC shares have a PE of 20.5x, which is still below the current inflated market average of 27.27x. But historically appears pricier than the average 10-15x mark.
WBC ASX Earnings, Debt, and NTA per Share:
We can see WBC shares currently have earnings per share of $1.25, this gives it its overvalued PE of 20.5x. Another way of looking at this is 4.85% of their share price is backed by solid earnings.
Westpac's EPS has remained stagnant over the last decade, and the group experienced a massive drop-off from the COVID-19 crash.
Westpac Fundamental Comparison
Although compared to the broader market the banking sector does appear to have excellent fundamentals, at face value, WBC does seem overpriced compared to the other big banks.
Looking at Westpac's earnings multiple of 20.5x this does seem on the higher end compared to NAB's 15.6x. CBA has historically been the pricier of the four banks but is still appearing cheaper with a PE of 20.2x.
In terms of asset valuation, Westpac's price to book is slightly more attractive at 1.3x, meaning you are paying a lower price for more tangible assets when purchasing WBC shares.
In terms of Return on Equity and Return on Assets, WBC does seem to lag behind the CBA, ANZ, and NAB.
Should I Buy Westpac Shares: Financials
Westpac Banking Corp (ASX: WBC) released its HY21 statement in May. According to the WBC financial calendar, the group is set to announce its full-year results on the 1st of November.
Here are the groups HY highlights:
- Statutory net profit $3,443m, up 189%
- Cash earnings $3,537m, up 256%
- Cash EPS 97 cents, more than tripled
- NIM 2.09%, down 4 bps
- ROE 10.2%, up from 2.9%
- ET1 capital ratio 12.34%, up 153 bps
- Interim dividend, 58 cents per share
“It has been a promising start to the year with increased cash earnings, growth in mortgages and continued balance sheet strength"WBC CEO: Peter King
Westpac's results have largely been attributed to impairment benefit from an improving Australian economy.
After initially deteriorating in 2020 from the economic impacts of COVID-19, credit quality metrics improved in First Half of 2021. The improvement has been due to the success of government stimulus measures, better labor market conditions, and the support provided to customers, including repayment deferrals.
A Strengthening Economy 1H21
Over the period we have seen a generally improving economy. We can see a strong rebound in spending. We also see a complete ‘V-Shaped’ recovery in GDP.
Future results will be dependent on the economic recovery and linked to the COVID-19 response and continued government support.
WBC ASX Analysis Unemployment
- Number of employed people and hours worked in June both above pre-COVID-19 levels
- Various federal and state government stimulus programmes continue.
WBC ASX Analysis Dwelling Values
- National dwelling values 12.4% above the previous peak achieved in April 2020
- All geographies up over the quarter and prior year. Regional growth strong.
WBC ASX Analysis Gross Domestic Product
- GDP and GDP per capita up 1.1% and 0.8% respectively for the year to 31 March 2021
- The household saving ratio of 11.6% remains well above the 1Q20 savings ratio of 7.9%.
Off the back of the growing economy, Westpac has seen an increase in mortgage applications, back to pre-COVID levels.
Should I Buy Westpac Shares: Group Results
In Westpac's group results, we see Net profits are up 189% from the PCP, with the group realizing a profit of $3.443 Billion. We can see that the group's income has remained relatively stable over the past year.
Westpac's bottom line has been influenced by impairments, in HY21 the group realized an impairment benefit of $372M, in the previous two periods WBC realized impairment charges including a $2.2 Billion charge in the previous corresponding period.
In WBC's notable items, AUSTRAC payments have been completely reduced, benefiting the group billions compared to previous periods. The group also saw $193 Million in asset revaluations including sales of Z1P holdings, and revaluation of Coinbase holdings.
Should I Buy Westpac Shares: Balance Sheet
Should I Buy Westpac Shares: Capital
Capital requirements are set by APRA under the banking act. The prudential standard applies to all ADI's (authorized deposit-taking institutions). APRA's standards are set to reduce the risk of collapse of the banking sector and produce the Australian economy. Australia's capital standards are some of the most stringent in the world, meaning our banks are amongst the best-capitalised banks globally.
Capital is the cornerstone of an ADI’s financial strength. It supports an ADI’s operations by providing a buffer to absorb unanticipated losses from its activities and, in the event of problems, enables the ADI to continue to operate in a sound and viable manner while the problems are addressed or resolved.
We can see that Westpac's CET 1 capital ratio remains high at 12.34%, well above APRA's 'unquestionably strong' benchmark. WBC's strong capital position allows them to maintain strong dividends and reduce financial risk.
How can over-capitalisation be a negative? Since the banking sector is required to hold a lot of free capital, this money must remain on the group's balance sheet as liquid capital, earning low returns. The capital can not be reinvested into the business. Due to this, we see the Return on Assets is extremely low across the banking sector at around 0.6%.
"Capital remains well above APRA’s unquestionably strong benchmark of 10.5%"
What is CET 1? CET1 capital is considered the highest quality capital because it does not result in any repayment or distribution obligations on the institution. As a result, it is also the riskiest for capital owners (shareholders) and therefore carries the highest cost.
What are the capital requirements? The minimum CET1 capital ratio for ADIs is set as the 4.5 percent international minimum, plus a capital buffer that provides an additional cushion. These buffers make up an additional 2-4 percent of CET1 capital.
The four major Australian banks need to have CET1 capital ratios of at least 10.5 percent to meet the ‘unquestionably strong’ benchmark set by APRA.
WBC ASX: Insider Ownership and Trading
We can see that the General public and Institutions own the majority of Westpac Banking Corp. Insider ownership is extremely low at 0.04%, this is to be expected, and is seen across the other big 4 banks.
WBC's low insider ownership is representative of its long history. The group is a result of numerous mergers, privatizations, and acquisitions.
We generally like companies with large insider ownership. Skin in the game helps ensure the management’s motives are in line with ours. For large-cap companies insider ownership will be lower, 3-5% would be decent in this case. WBC's ownership structure is standard across the banking sector, as such we don't see this as a red flag.
Top WBC ASX Shareholders
Insider WBC ASX Transactions
|01 Sep 21||Sell||$321,440||Margaret Seale||12,522||AU$25.67|
|04 Feb 21||Buy||$99,501||Michael Hawker||4,558||AU$21.83|
|04 Feb 21||Buy||$99,501||Michael Hawker||4,558||AU$21.83|
Insider transactions have been relatively low in 2021. We can see at the beginning of the year Michael Hawker purchased $199k of WBC. Hawker was recently welcomed to the WBC board in late 2020. In September non-executive director Seale sold $321,440 shares.
Should I Buy Westpac Shares: WBC Market Share
- Customers: 14 Million
- Australian household deposit market share: 21%
- Australian mortgage market share: 22%
- Australian business credit market share: 15%
- NZ deposit market share: 18%
- NZ consumer lending market share: 18%
- Australian wealth platforms market share: 18%
We see across the board Westpac has a strong diversified market share across all key sectors ranging from 17%-22% market share across loan categories. This puts WBC in a very strong position and not overly dependant on one source of interest income.
In comparison, we see that NAB is the key bank in business lending, but falls short in other categories.
Is Westpac Too Big to Fail: Loan Book Analysis
Westpack Banking Corp holds a total of $690 Billion in loans. The large majority of this is from Australian housing representing a staggering $443.5 Billion. To put this into perspective the Australian GDP is $1.7 Trillion AUD (2020).
Should I Buy Westpac Shares: Future Prospects
There is no question that Westpac and the entire market have felt the effects of COVID-19. WBC has seen impairments and higher expenses. In 2021 we are beginning to see a marked turnaround in economic conditions which is, of course, very good news looking forward. Profits have come soaring back for the group as impairments expenses drop.
“While challenges remain, we expect the Australian economy to expand by 4.5 percent in 2021, supporting a 4.6 percent increase in total credit with residential lending expanding 6.5 percent.
Off the back of the COVID recession, increased savings among Australian households has surged the housing market and caused new leading to jump 49% over the last year.
Although NIM remains low, interests may begin to return with increased inflation. Which would improve interest margins and interest income across the group.
COVID-19 lockdown restrictions have been the death of many Australian businesses, but those that remain are seeing profits beginning to return, especially as borders begin to reopen. From this recovery, businesses will be seeking to grow and looking to the banks for loan support.
Should I Buy Westpac Shares: Prophet's Take
Westpac's profits have come soaring back in HY21, and we are looking forward to more strong results in November. This has been due to the "V-Shaped" recovery of the Australian economy. We are now seeing surges in housing demand and household savings.
Westpac's current valuation seems largely in line with the market average, but in comparison to the banking sector, it does seem slightly overpriced. Although they have maintained a very strong market share position, CBA has a larger share and comes at a cheaper earnings multiple. Read our CBA analysis here.