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Monday, 6 November 2017
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Westpac Results and the Banks

Westpac Bank (WBC) - Full year results are out this morning they appear to be a small miss on expectations. They have a 138 page results announcement with a LOT of detail. Main points:

  • Cash profit up 3% to $8.06 billion up from $7.82 billion. Expectations had been for a 4% increase in cash profit.
  • Final dividend of 94c, same as last year, and in line with the recent habit of the other banks, no growth in dividend. It is becoming the norm.
  • Tier 1 capital ratio of 10.6%. As with the other banks they are ahead of the game reaching the “unquestionably strong” tier 1 capital target for 2020.
  • Revenue up 4% to $21.802 billion.
  • Return on equity of 13.8%. Pretty good really.
  • Net profit up 7% to $7.99 billion.
  • Outlook statement says “Outlook for Australia remains positive overall”. Operating divisions all performing well.
  • “We remain positive about Australian housing market, although we expect price growth to moderate through 2018”.
  • “Few signs of speculative behaviour in housing markets”.
  • Net interest margin fell 4 basis points to 2.06%.
  • The government bank levy has cost $95 million in 2017, will be paid out of retained earnings and is equivalent to 2c per share.

These are the numbers at the moment.

Again, as with the NAB and ANZ, the banks are seeing low/no significant growth anymore with forecasts for revenue to grow 3-4%, earnings to grow 1-3% and the dividend to grow 1-2%. In the end the sector offers large income stocks without excitement. Now that may seem dull but when you consider that the yield curve is forecasting interest rates to stay around 2 to 3% for the next 10 years there is something really rather attractive about an 8.1% yield based upon a very stable earnings stream.

If I was to offer a bond with an 8.1% yield I would be hit with billions of dollars in the current markets. So if you can handle a little bit of equity market volatility then these stocks are stacking up as perfect retirees stocks. Low risk, high yield. You can look around the rest of the market and find stocks with a yield but very very few are going to have the earnings stability and reliability of the big banks. If you dumped your retirement money in here as opposed to a term deposit you get a 5% lift in income. Of course you have to mworry about a seismic market event that will take everything down with it, or some disruption in the bank sector (Google banks on the high street or similar), but if you are half vigilant (by reading Marcus Today) you can hopefully pick up on a rare seismic market event as it develops and do something about it (sell) and also get an inkling about the bank landscape changing; should it happen.

Of course we have the dividends coming up in the next couple of weeks - Macquarie ex-dividend on 7th November (tomorrow). NAB ex-dividend on 9th November (Thursday). ANZ ex-dividend on Nov 13 (next Monday) and I have yet to determine the exact Westpac ex dividend date. (Once these stocks have gone ex dividend the focus moves to the Commonwealth Bank which has a June year end and interim results coming up in February).

I’m not sure I would be buying “the market” which includes “the banks” at the moment because I 'feel' we are due some sort of US market correction. When that happens the sector will outperform (which is all the fund managers care about) but will not escape. I would be looking for that moment to buy in the short term, on any correction, otherwise if you set the realistic expectation that all you are going to get from the sector is an 8% yield, then you might consider dumping your term deposit money in here now. You will catch the current dividends. Of course you will then have to keep the market in your peripheral vision which you don’t have to with term deposits, but that’s the cost of a 5% increase in return.

So yes, not the most impressive bank sector results season, but the process of resetting everyone’s expectations about sector growth, or the lack of it, has just about finished as of these results. As of now, more realistic expectations are set in, including the expectation of muted growth, the inevitablitity of political attack (Royal commission on the way?), the almost fashionable cultural attack (AUSTRAC uncertainty), and regulatory interference (APRA). It doesn’t get much worse than that and many of those factors may now improve, allowing the sector to move back to growth one day, under the radar. So now is not that bad a moment to think about buying, for income, for the long term (ahead of these dividends). Not for a share price rally. That would be a handy bonus but a bit optimistic.

Let’s see what the research says tomorrow. Hopefully it will be all doom and gloom and provide a chance for income only investors to buy WBC for income in the long term before the dividend goes ex.

The chart below shows the 10% recovery after the February sell off, overdone post results, which included the negatives of higher Tier 1 capital requirements and APRA's lending restrictions. Post rally, this is not a bottom feeding moment, just a normal moment. To really catch these stocks on their backs is a one in 10 year event like the GFC when the whole world thinks the sky is going to fall. You may have to wait a month or years or forever before that moment arrives again. In which case now is as good a time as any for income investors.

Growth focused investors - look away....nothing to interest you here.

SOME TABLES  from the Westpac results presentation:

 

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