Westpac‘s restructuring plans draw scepticism, analysts downgrade earnings

Brokers aren’t convinced by Westpac’s plan to restructure and remove duplicated processes, 15 years after integrating St George’s systems, and have downgraded their expectations.

Shares in Westpac rose 2 per cent on Monday but lost all that ground and more during Tuesday’s session. Picture: Damian Shaw

Stockbrokers are sceptical of Westpac’s restructuring plans – finally integrating duplicated St George systems over 15 years after its 2008 acquisition – and have moved to downgrade earnings expectations for coming years.

Following an in-line $7.2bn yearly profit result on Monday that featured the unveiling of Westpac’s technology simplification ambitions, analysts across the street highlighted this meant costs in 2024 would be significantly higher than expected at about $11bn.

That would be much higher than Westpac’s original target in 2021 to keep costs capped at $8bn.

“The trajectory of the anticipated cost base over this time frame has done management credibility no favours,” Citi analysts wrote in a note to clients.

“The market needs to contend now with the already sharp step-up in costs in FY23/FY24, the subsidence of a number of key regulatory projects and a belated willingness by management to tackle the duplicated core processes that have been running side by side by over a decade.”

The Sydney-based lender on Monday said it was prepared to spend approximately $2bn per year on technology in order to accelerate its technology simplification program, but details were scant.

With subdued credit growth, fierce competition for both loans as well as deposits, and rising loan stress, the need to spend on its systems revamp while inflation remains high would be challenging.

This meant, according to analysts’ expectations, that growth in costs was likely to continue to outpace revenues this financial year.

“We applaud the well overdue decision to tackle the legacy IT architecture but eagerly await the detail and note it takes place whilst competitors are match fit and externally focused,” Jefferies banking analyst Matt Wilson said.

Citi, Barrenjoey, Jarden, Goldman Sachs, E&P Capital, JPMorgan and Jefferies all downgraded their earnings forecast for fiscal 2024 and 2025 by between 2 and 10 per cent.

UBS and Morgan Stanley were the exception, adjusting earnings for fiscal 2024 and 2025 slightly higher, mainly due to a more benign bad-debt forecast as Westpac’s borrowers continued to be resilient to higher rates and costs of living.

Consensus is now for net profit to fall 11 per cent to $6.4bn this financial year, and $6.3bn in 2025, before starting to rise again to $6.6bn in fiscal 2026, according to analysts polled by Visible Alpha.

“While the technology simplification announced … has been a long time coming, we believe it does, over time, have the potential to materially improve Westpac’s relative productivity positioning,” Goldman Sachs banking analyst Andrew Lyons told clients in a note.

Analysts acknowledged Westpac’s extremely strong capital position with $4bn in surplus cash, which was more than enough to reward investors with a $1.5bn buyback and a higher final dividend of 72c per share.

This meant that despite the downgrades, Citi, UBS, Jarden, Barrenjoey, Morgan Stanley, JPMorgan and Goldman Sachs raised their 12-month target prices for Westpac shares slightly to an average of $21.93.

Westpac shares rose 2 per cent on Monday as investors cheered the buyback, but closed down 2.7 per cent on Tuesday at $21.33, as analysts and investors digested the result and adjusted their expectations.