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Westpac’s AFS Division Sets Course for Attractive Earnings Growth

Written by on March 31, 2013

Westpac recently showcased the Australian Financial Services (AFS) division franchise with particular emphasis on strategy, capability and leadership. As expected, the operational presentation included very limited financial information, and was heavy on positive spin. Divisional goals focus on balancing sustainable growth with high returns on equity, improving productivity and maintaining balance sheet strength.

We consider our fiscal 2013 AUD 7.0 billion group cash earnings forecast pretty much ‘locked in’ and, more importantly, our focus is now on earnings for fiscal 2014 and 2015. Between now and the September year end, credit growth is not going to rebound strongly, net interest margins should improve only moderately, productivity is likely to be stable and bad debts should not surprise either way. Despite our confidence, we will be more certain of our full-year earnings forecast when Westpac releases first-half 2013 profits on 3 May. We expect cash earnings will likely increase 6% on first-half 2012 to around AUD 3.4 billion. We are positive on the medium-term earnings outlook, and at current prices Westpac is moderately undervalued, trading at 6% discount to our AUD 33.00 fair value estimate. Following a stellar share price run over the past 12 months, with the stock up 41% excluding dividends, Westpac is less attractive from a valuation perspective than our favoured major bank exposure National Australia Bank NAB.

Westac’s Australian businesses, excluding institutional banking, were consolidated into a single division in late 2011, and are now under the leadership of external appointment Brian Hartzer. The expanded division dominates the group and includes Westpac retail and business banking, the St. George Bank group and the BT Financial Group, with combined earnings of AUD 4 billion in fiscal 2012, accounting for over 60% of group net profit after tax (NPAT). The AFS outlook presentation was undeniably optimistic and upbeat, but irrespective, we have long been positive on Westpac and we believe our position is further strengthened by the appointment of such an impressive and capable executive in Brian Hartzer. The AFS presentation provided us with more confidence in our upbeat major bank investment thesis. We believe our positive macro view is supported by the outlook for moderate growth in gross domestic product, stable employment and steady earnings growth,with dividends expected to rise in line with earnings per share growth. We have long argued major bank balance sheets are strengthening. Dominant market positions and pricing power are not under threat, profits continue to improve, loan quality is stable, productivity is improving and relatively high fully-franked dividends are sustainable.

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