In early afternoon trade, the Westpac Banking Corp (ASX: WBC) share price is flat following its AGM presentation.
Reflecting on the year that was and looking towards the bank's 200th birthday in 2017, Westpac chairman Lindsay Maxsted and CEO Brian Hartzer provided a thorough update to investors.
2015 performance
Mr Hartzer described Westpac's financial performance in 2015 as "solid". Cash profit rose 3% in 2015 to $7.82 billion during the year. Return on equity came in at 15.8%, above the bank's target of 15%. Mr Hartzer noted much of the bank's lending improvement throughout 2015 was a result of an increase in Australian mortgages.
Dividends
Mr Maxsted noted growth in dividend payments to shareholders had slowed in recent years. However, he said the bank continues to pay out a high portion of profits to investors to maximise the benefit of franking credits.
Capital
By September 2015, Westpac had a CET1 capital ratio (the bank's buffer against market downturns) of 9.5%, which was above the upper end of its target range of 9.25%. The most recent Financial Services Inquiry (FSI) will likely lead to many regulatory changes for the banking sector.
For example, changes to the risk-weights of mortgages meant Westpac's capital support for its Australian mortgage portfolio jumped by over 50%, Mr Maxsted said.
"Requiring banks to hold more capital for example has real costs," he said. "It impacts returns, it increases costs to borrowers and it impacts the economy by diverting resources from other productive uses."
With Westpac and its major peers raising over $20 billion in extra CET1 capital throughout the year (mostly from local investors), Mr Maxsted said it was the equivalent of $2,000 for every Australian household. However, regardless of the costs to banks' bottom lines, higher capital buffers will help Australian banks avoid the need to be bailed out by taxpayers.
Outlook
Westpac said it is "positive" on the outlook for the Australian and New Zealand economies. It said growth in Australia has been below trend thanks to a slowing mining sector, but an improvement in household spending, non-mining investment, and exports should help the economy rebound modestly in 2016. It is forecasting real GDP growth of 2.75%, from 2.2% this year.
Credit growth will remain below trend but largely in-line with that of 2015 according to Westpac.
Buy, Hold or Sell?
Despite its outlook, following the AGM presentation, Westpac shares drifted marginally lower. In my opinion, a meaningfully lower credit growth environment lays ahead for Australia's major banks, with competition increasing. Therefore, I'd like to see a lower share price before adding Westpac in my share portfolio.
