Mixed analysts’ reaction to Westpac’s earnings results as new cost target under spotlight

Mixed analysts' reaction to Westpac’s annual earnings results amid concern over whether it would meet its revised cost target.

Westpac’s full-year results triggered a mixed reaction from analysts, with some raising their earnings estimates for the bank, while others trimmed expectations or questioned whether it would meet a revised cost target.

UBS analyst John Storey maintained a buy rating on Westpac on Tuesday, citing an “attractive valuation” and underlying strength in the bank’s mortgage business.

“Westpac is winning share in owner occupied mortgages, stabilised household deposits and is starting to grow topline revenue again,” he said. “Yes, Westpac is competing on price to drive volume, which in our opinion is the correct strategic approach.”

Westpac’s shares recovered some ground on Tuesday to close 2 per cent higher at $23.66. That followed sharp losses on Monday, when the stock tumbled 3.9 per cent, but a strong run into the result.

Mr Storey still downgraded his Westpac cash earnings-per-share estimates on Tuesday for the 2023 to 2025 years by 7 per cent to 12 per cent. That was driven by “higher-than-expected costs, partly offset by net interest income improvements and a lower bad debt outlook”.

Westpac’s cash profit fell 1 per cent to $5.28bn for the 12 months ended September 30, compared to the year earlier period. Annual net interest income fell to $16.6bn, from $16.7bn in the prior year, and non-interest income – which largely reflects fees – tumbled 45 per cent.

But Westpac’s annual cash profit was dented by a $1.1bn previously flagged loss on the sale of its life insurance division to TAL Dai-ichi Life Australia. The bank’s statutory annual net profit rose 4 per cent to $5.69bn and core earnings, excluding notable items, were improved in the latter half.

Bumper inflation and wage costs saw Westpac chief executive Peter King shift from a prior $8bn cost target by its financial year 2024, upping that to $8.6bn over the same time frame.

Mr Storey labelled the new figure “an ambitious target” with his estimate sitting at about $9.2bn, excluding businesses Westpac is seeking to divest.

Goldman Sachs analyst Andrew Lyons raised his earnings-per-share estimates for Westpac over the next three years on the back of the broker’s expectations for lower expenses and improved net interest margins in 2023.

“While on the surface, the full-year 2022 result suggested Westpac’s NIM (net interest margin) leverage was underwhelming relative to some peers, we think the second half 2022 was adversely impacted by late-in-the-half liquidity build … management’s guidance on its full year NIM trajectory was better than we had previously anticipated,” he said.

Macquarie Capital analyst Victor German maintained a neutral rating on Westpac after the bank’s results, citing “execution risk” around Mr King’s turnaround plan and cost-cutting drive.

“We see the current valuation discount (to Commonwealth Bank and NAB) as appropriate,” he said.

“With the ongoing benefit of higher rates and replicating portfolio tailwinds, we expect margins to peak in the first half 2023 at circa 2.06 per cent and begin to moderate gradually in the second half 2023. However, we continue to see downside risk to the rebased expense guidance, which is one of the key reasons for our forecasts being below consensus.”

Citigroup analyst Brendan Sproules downgraded his 2023-2025 estimates for Westpac’s cash earnings by 2 per cent to 4 per cent, but retained his buy rating on the stock.

The lower earnings estimates reflected factors including stronger mortgage competition in the sector, lower wealth income and unchanged cost assumptions.

“Two halves of cost reductions should provide incremental credibility to management’s full-year 2024 aspirations. While peers may have exhibited stronger rates leverage in recent months, cost and investment discipline provides a comparable core earnings trajectory and the valuation remains undemanding,” Mr Sproules said.

JPMorgan's analysts left their estimate for Westpac’s cash profit unchanged for 2023, but edged up their 2024 estimate by 1 per cent.

“Net interest income forecasts have increased by circa 2 per cent, largely reflecting the higher second-half 2022 base. This has been offset by a 7 per cent reduction in non-interest income forecasts and a 1 per cent to 2 per cent increase in costs.”