Around 600,000 Westpac Banking Corp (ASX: WBC) shareholders will be cheering on the performance of their bank, with another strong operating performance achieved in FY14.
For the year ending 30 September 2014, Westpac achieved a cash profit – the preferred measure of banking profitability – of $7.628 billion, up 8% on the prior corresponding period (pcp).
In a media release to the ASX, CEO Gail Kelly said it was a, "high quality result, which reflects the consistent execution of our customer-focused strategy. We have delivered on improved growth and returns, while maintaining our disciplines of strength and productivity that have become hallmarks of Westpac."
Indeed, the bank's earnings per share were 254.4 cents, up 8% and slightly ahead of analysts' expectations. Other key takeaways from today's results include:
- Final dividend of 92 cents per share (cps), taking the full-year payout to 182 cents per share, up 5%
- Cash return on equity (ROE) of 16.4%, up 46 basis points
- Common equity tier 1 capital ratio of 8.97%, down from 9.1% last year
- Expense to income ratio of 41.6%
- 4% increase in net tangible asset per ordinary share
- Australian mortgage growth at 0.9 times system
- Household deposit growth at 1.2 times system
- Business lending growth at 1.3 times system
- Impairment charges drop of 23%, or $197 million, to $650 million
- Lloyds acquisition contribution of $64 million to cash earnings
- Lending and customer deposits growth, up 8% and 7% respectively
- Net interest margin of 2.08%, down 7 basis points (reflecting higher amount of liquid assets and lower interest rates)
- Non-interest income up 7%, on the back of strong performance from BT Financial Group (ASX: BTT)
- Westpac institutional bank cash earnings down 7% to $1.468 billion.
Outlook
Commenting on the outlook for the bank, the CEO said housing credit growth was expected to remain in place throughout 2015, "driven by strong demand and continued low interest rates."
"Overall, we have a strong franchise that is well positioned for the year ahead. We believe we will continue to deliver strong outcomes for our customers and our shareholders in Full Year 2015. Less than three years out from our bicentennial year, the Westpac Group is in great shape," said Kelly.
Buy, Hold or Sell?
At market open this morning, shares in the $108 billion company were trading slightly higher, up 0.24%.
However, whilst today's results seem spectacular, it's important to put them in context with the current macroeconomic environment and adjust for the cyclicality in many of Westpac's top performing business units.
Indeed today's result was largely in line with analyst forecasts but excluding the impact of lower provisions for bad and doubtful debts and the Lloyds acquisition, today's result would be less impressive, with my estimate putting earnings growth lower than 5%.
For such a large and established company that kind of growth is great but given its current valuation, I'm not so enthusiastic.
I believe that for potential bank stock investors, Westpac's defensive characteristics and growth potential – or lack thereof – does not justify today's market price. Indeed, Westpac shares trade over three times tangible assets per ordinary share and a whooping 16 times its trailing five-year average earnings, significantly higher than my target buying levels.
I believe there will come a time to buy Westpac shares, but it's not now.
