Westpac Shines

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This story features WESTPAC BANKING CORPORATION, and other companies.
For more info SHARE ANALYSIS: WBC
The company is included in ASX20, ASX50, ASX100, ASX200, ASX300 and ALL-ORDS

By Greg Peel

Today rates as probably a bit of a shame for those investors who piled into Westpac Bank ((WBC)) on the back of its impressive result yesterday, given the shares are now down 1.6% at lunch time. Overall the Financials sector is down 1.8% following a woeful night for the equivalent sector in the US. US weakness was all about credit crunch concerns, and that’s one area where Westpac actually stands out as a beacon.

Bank analysts were unaware of what was to transpire last night when they wrote up their full year results responses for Westpac yesterday. Collectively, the FNArena database analysts shifted their average target up from $29.83 to $31.14. The market pushed the stock to close at $31.06 yesterday, but as we speak it has slipped back to $30.57.

Westpac’s result came in slightly ahead of all forecasts, leading to general FY08 earnings forecast upgrades of around 1-2%. It was vindication for banking analysts who had, on average, set Westpac as the number one pick amongst the top five banking stocks over the past few months of turmoil. The market, however, has responded in kind and pushed Westpac’s share price up quite considerably, so prior to this result the bank had lost its top spot. That position is now held by National Bank ((NAB)) which analysts see as having underperformed its peers on a valuation basis.

Not so for Westpac. The bank only received one downgrade today – UBS dropped from Buy to Hold – but UBS’ reasons were concurred with in the reports of many other brokers, that is, the stock is now fully priced. That left Westpac with a 3/7/0 B/H/S rating which puts it in second spot behind NAB with 5/4/0. Number three position is held by Commonwealth ((CBA)) with 3/6/1 while St George ((SGB)) on 2/7/1 has jumped over ANZ Bank ((ANZ)) on 1/7/1. St George was helped by an apparently good result, but with a share price fall of 2.2% today (so far) St George has been the worst performer. Last night’s Dow fall had a lot to do with an analyst’s warning about Citigroup’s capital situation, and St George has the least secure capital position of the top five.

Westpac’s capital situation is, on the other hand, very secure. ABN Amro (Buy) notes as Westpac’s key strength its current capital position and the bank’s capacity to continue to grow capital organically, without the need to visit troubled securitisation markets. ABN believes Westpac has the capacity to move to the top end of its capital adequacy target range within the next 12-18 months, and this could even lead to a capital return.

Within the result the focus was on 13% earnings per share growth and strong performances from most divisions, especially retail, which grew profits by 21%. Retail benefited from strong mortgage growth on consistent margins, and it is exactly this factor that puts the big banks streets ahead of their smaller or non-bank counterparts post credit crunch. The Westpacs are stealing lending business back from the distressed non-bank lenders such as RAMS Home Loans ((RHG)), which Westpac has now duly devoured.

Also notable in the result was an increase in provisions for bad loans – a very prudent approach in all analysts’ eyes. That Westpac has put aside $43m puts paid to fears outgoing CEO David Morgan might “dress up” the result to look good while providing a hospital pass to incoming CEO Gail Kelly. It was also notable that Westpac’s earnings came despite an 8.8% increase in costs, most of which was due to paying its existing staff better money.

Analysts now, for the most part, believe Westpac to be fully priced (not counting today’s fall). Westpac is trading at about a 4% premium to its peers which needs to be brought back into line, and at 15.2x FY08 earnings its PE has become historically high in a time of uncertainty for financial enterprises. The Buy raters still see the bank as being able to outperform its peers however, given the quality of this result.

It has to be remembered, however, that most banking analysts rate their charges on a relative, rather than absolute basis. JP Morgan, for example, rates Westpac Overweight within the sector but rates the banking sector overall as Underweight.

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