Like its peers, Westpac Banking Corp (ASX: WBC) has done an excellent job of smashing the S&P/ASX 200 (ASX: XJO) (INDEX: ^AXJO) over the past 10 years. Through the lows of the GFC, Westpac shareholders have enjoyed generous fully franked dividend payments and capital gains of around 100%.
As Australia’s second-largest bank, Westpac controls 23% of the mortgage market, 23% of household deposits, 19% of business banking and 20% of wealth platforms. Over in New Zealand, it has a 21% market share of deposits and 20% share of consumer lending. Altogether it boasts an astonishing 12 million customers.
Similar to the Commonwealth Bank of Australia (ASX: CBA) its most lucrative businesses are in retail banking. Under different (sometimes deceptive) brand names, its subsidiaries such as St. George and BT Financial Group are the divisions which generates a majority of its earnings.
Although St. George (which in turn includes names such as Bank of Melbourne, BankSA and RAMS) continues to grow cash earnings, BT Financial Group is an industry leader in wealth management products, and will be one of the key growth areas for management in coming years.
Westpac’s 2014 half-year cash profit of $3.77 billion was 8% higher than the previous corresponding period in 2013. However it was aided by a 22% reduction in provisions for bad and doubtful debts, and a 12.7% drop in interest expense. This offset the 6%, or $1 billion, lost in interest income over the 12-month period.
In response, non-interest income (things like insurance and wealth management products) increased 9.4% or $273 million. With only 9.6% earnings per share growth over the period from March 2013 to March 2014 which, as highlighted above, was largely from reduced costs, it’s no wonder why its shares increased only slightly more than the index.
To buy, or not
With analysts tipping only modest growth for Westpac over the next few years, it’s easy to see why many investors think Westpac is overvalued. Despite boasting a 5.2% dividend yield, I think (at its current price) Westpac will struggle to beat the market over the next five years and therefore I feel it is not worthy of a ‘buy’ rating.
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