This morning, Westpac Banking Corporation (WBC) provided a third-quarter update, which came in above market expectations. We typically refrain from commenting on trading updates, as they are often too volatile and can provide a misleading picture, both positive and negative. However, today’s share price move warrants a brief note. The HNW Portfolio holds a 7.5% weight to WBC.

Key Points:

  • Mortgage Portfolio: Net profit increased by +8% to $1.9 billion for the quarter, driven by effective cost management, which resulted in expenses rising by only 3% for the year to date, primarily due to wage increases and investments in technology. WBC also saw an increase of $16 billion in loans to $840 billion, and deposits increased by $10 billion to $706 billion.
  • Net Interest Margin: Increased by 0.04% to 1.99%, driven by margin management on both their deposit book and loan book in New Zealand. Similar to CBA yesterday, small moves in the interest margin can have a big impact on profits, given WBC’s loan book of $997 billion.
  • Very Low Bad Debts: Following the CBA trend from yesterday, WBC announced that bad debts remain extremely low, with 0.05% of their loan book currently impaired, well below the pre-pandemic average of 0.30%.
  • Capital Ratio: WBC’s capital ratio increased to 12.3%, which remains above the bank’s target operating range of 11.0-11.5%. Depending on their fourth-quarter results, more on-market share buybacks could be announced at the full-year result.
  • Why is the stock up? Net interest margins are higher than expected and WBC’s lower valuation relative to CBA sees more on-market share buy-backs.

CEP Strategy:   This was a solid result from Westpac, with the business travelling well. We own WBC in the Portfolio due to its heavy exposure to mortgages, which comprise 65% of WBC’s loan book. Throughout the cycle, mortgages have historically incurred lower bad debt charges than business lending, primarily due to Australia’s home loan recourse lending and higher margins. While we expect loan losses to increase, higher net interest margins will offset this. We remain happy holders of the bank, which trades on a PE of 14.5x with a 5.9% fully franked yield. Controlling costs was a highlight in the current inflationary environment.

WBC finished up +6.3% to $36.04.