Wednesday, January 25, 2017

An AIM International Holding: Westpac Banking (WBK) by Jaclyn Godwin. “WBK Seeks to Re-Focus in 2017”

Westpac Banking Corp. – ADR (NYSE:WBK - US) 
“Australian Bank Controls Costs in Troublesome Times”
By: Jaclyn Godwin, AIM Student at Marquette University

Disclosure: The AIM Equity Fund currently holds this position. This article was written by myself, and it expresses my own opinions. I am not receiving compensation for it and I have no business relationship with any company whose stock is mentioned in this article.


Westpac Banking Corp (NYSE: WBK - US) is an Australian bank that offers retail, business, and institutional banking and wealth management services. The firm operates within Australia and New Zealand. It was founded in 1817 and is headquartered in Sydney Australia.
·         Despite difficult macro conditions, WBK reported adequate results in 2016. The firm has focused its efforts on operational disciple and cost management. It continues to strengthen the balance sheet, reporting a Tier 1 Ratio of 9.5% in 2016.
·         The firm has re-evaluated its target return profile, projecting a medium-term ROE closer to 13-14% due to its emphasis on capital and cost management in the past year.
·         As the banking system evolves, it has become more important for firms to go digital. WBK’s emphasis on this facet can observed in the 22% of sales that were attributed to its online platform. The firm’s relationship with Oracle will continue to propel it forward in this regard.

Key Points:

Like many other banks, WBK faces a challenging macro backdrop. Competition remains intense as regulatory and political headwinds continue. Much of his has heightened compliance costs. Though, such Australian capital pressures could ease up in line with President Trump’ selected policies. Despite the environment, the bank has fared well. On a strategic level, management re-focused its efforts on operational discipline. Capital was raised, mortgage rates adjusted, and expenses managed strictly. The company reported 2016 results in line with the previous year. Cash earnings were $7,822, consistent with 2015. ROE was recorded at 14%, down 185 bps and the Tier 1 capital ratio was 9.5%, down 2 bps.  

The stock was added to the portfolio in December of 2015, due in part to its strong balance sheet which continued into 2016. As mentioned, its Tier 1 capital ratio was recorded at 9.5%, well above its preferred range. Due to higher liquidity regulations, the firm strengthened its deposit base and adjusted its provisions to be more conservative. Following an industry-wide trend, the firm repriced their mortgages, leading to an increase in spreads. Unfortunately, fund costs and low interest rates negated this positive impact.

As a result of the renewed focus on liquidity requirements, management has re-evaluated their target ROE. Low interest rates, tighter liquidity standards and higher compliance/regulatory costs have made it difficult to maintain a high ROE. For the medium-term, WBK re-adjusted management to 13-14%.

The firm is also going through a bit of a digital transformation. By the end of fiscal 2016, the firm logged 1 billion logins on its digital channel and attributes 22% of its sales to that channel. Further, seven out of the ten manual activities in call centers were digitized.  A recent partnership with computer technology firm Oracle will propel its customer service platform.

In coming years, it will be necessary to monitor the development of the Australian economy. There has been a surge in the population. Despite this growth, government spending remains tight. WBK’s success will be hinged to Australian policies moving forward.

What has the stock done lately?

There is not much to say about WBK’s recent stock performance. During the latter half of 2016, it saw very little movement, gaining some upward momentum since August of 2016. As of January 20, 2017, the price closed at $24.16.

Past Year Performance: Since the stock was added to the portfolio, WBK has stagnated a bit. Since its addition, the stock has increased ~5.6%. Relative to the S&P 500 index, it has significantly underperformed. It took a hit in early 2016. The Brexit results also had an impact on its decline in late June of 2016. It has yet to reach its five year peak of $35.06 that was record in June of 2013. There is some hope that after the regulatory environment stabilizes, the firm will be able focus on returns, rather than cost management.

My Takeaway

Since WBK was added to the AIM International Fund in late 2015, it has re-focused its efforts on cost management. Considering the economic and political environment, this seems warranted. Although stock returns are lacking, a focus to returns in coming years would be beneficial.  For now, WBK is a victim of its environment, re-focusing efforts on factors it can control (costs).

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