Profit report: Why the Westpac Banking Corp share price is flattening

Credit: Kiwiteen123

The Westpac Banking Corp (ASX: WBC) share price will be one to watch today after Australia’s oldest bank released its interim results.

Key highlights include:

  • Reported net profit after tax of $3,907 million, up 6% on the prior corresponding period.
  • Cash earnings of $4,017 million, up 3%.
  • Cash return on equity of 14%.
  • Common equity Tier 1 (CET1) capital ratio of 10%.
  • Lending and customer deposits grew 4% and 6%, respectively.
  • Net interest margin down 7 basis points to 2.07%
  • Cash earnings per share of 119.8 cents, up 1%.
  • Interim dividend held firm at 94 cents per share.

According to the release, the 3% increase in cash earnings was the result of a 1% increase in core earnings and a 26% decline in impairment charges.

The increase in core earnings was due to a rise in lending and deposits, partially offset by a 7 basis point decline in its margins.

Westpac CEO Mr Brian Hartzer had this to say on the results:

“This is a solid result given the current complex operating environment. The benefits of our strategy are also clear in this result. We’ve digitised more processes, which is improving service for customers while also bringing costs down. We’ve launched a number of new systems including Samsung Pay, SuperCheck, and our new wealth system Panorama; and we’ve added more than 100 new online features to assist customers.”

Should you invest?

Overall I felt this was a solid result, but perhaps not enough to justify the premium its shares trade at.

Based on today’s result Westpac’s shares are changing hands at approximately 14x annualised cash earnings.

In the last 10 years its shares have traded at an average of 13x earnings. Whilst I could justify paying a premium to this when earnings are growing at a strong rate, I struggle to do so when cash earnings per share is growing at just 1%.

So for now I would suggest investors give the likes of Westpac, Commonwealth Bank of Australia (ASX: CBA), and Australia and New Zealand Banking Group (ASX: ANZ) a miss, and wait for them to come down to more reasonable valuations.

In the meantime I would suggest investors look at this quality dividend share with a HUGE yield and strong growth prospects instead.

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Motley Fool contributor James Mickleboro has no position in any stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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