Bank, dividends

Today marked the release of Westpac’s 2021 Interim Financial Results and quite possibly the beginning of the new Australian banking era. We’re seeing massive moves in profits, share prices climbing and the return of bank dividends.

The Collapse of the Banking Industry

2019 spelt doom for the Australian Banking industry with the Banking Royal Commission which uncovered severe misconduct in the entire industry. The bank had a severe culture of greed and corruption in money laundering, drug syndicates, terrorism financing, and ignored statutory reporting responsibilities and impropriety in foreign exchange trading, meanwhile there was a clear lack of regulatory intervention by the government.

“Selling became their focus of attention. Too often it became the sole focus of attention. From the executive suite to the front line, staff were measured and rewarded by reference to profit and sales. The customer’s ‘needs’ are formed by reference to what the entity has to sell.”

The commission cost the industry billions. Over $7 Billion to be exact. This was not only a massive blow to the industry but arguably to Australia as a whole, with the financial sector making up around 30% of the stock market.

Profits, Commission, Bank, Dividend, Westpac, WBC

How did Prophet Respond?

To no surprise markets had a mass sell off of all things banking, driving share prices down around 30% across the board. Prophet saw this as an opportunity to buy some of Australia’s best businesses at a hefty discount, namely Westpac and Commbank. “The time to buy is when there’s blood in the streets.” 

Today

For the years following the commission banking profits have been hit by impairment charges, squeezed by interest rates, and defaulted by Coronavirus. Today Westpac came out with a profit of $3.4 Billion, up a MASSIVE 189%, a feat never before seen by the likes of the big 4 banks. It doesn’t stop there with cash earnings of $3,537m, up 256%

The increase in Net Profit was largely due to large impairment charges incurred in First Half 2020 of $2,238 million, whereas First Half 2021 included an impairment benefit of $372 million. Westpac puts down its reduced profits to four factors;

• Provisions for estimated customer refunds, payments, associated costs and litigation;
• The write-down of intangible items, including goodwill;
• The impact of asset sales and revaluations; and
• Costs of the AUSTRAC proceedings – including the penalty

WBC’s Share Price

Today WBC is up exactly 5% after their financial announcement. They’re currently trading at a share price of $26.23. This gives them a market cap of $91.6 Billion. They have a forward looking EPS of 1.538, giving them a PE of 19.89, they also have a book value of $15.67.

The New Era of Australian Banking

Going forward there’s still a lot of challenges the banking sector needs to overcome, NIMs are still at low rates of around 2% due to the RBA and the global economic recessions.

Banking, Margins, Profits, Revenue, WBC, Westpac, NIM, Interest rates

However, despite the challenges we believe Westpac and Commonwealth banks are some of the best businesses in Australia. We’re seeing them expand and respond to the times with massive acquisitions over the past few years of millennial focused online banks and Commbank has also taken a massive play into the Buy-Now Pay-later Sector. For years these banks have been excellent dividend stocks and at the right price have massive yields. We managed to grab them at yields of around 10%, and now enjoy that yield plus the decent capital gains they have returns over the past few years. It’s no surprise WBC has announced a fully franked dividend of $0.58 (Ex May 13).

Prophet’s Take

We have a massive stake in Commbank and Westpac and will continue to enjoy solid returns. We are always looking to deploy more capital into both, at the right price and PE.

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