The Westpac Banking Corp (ASX: WBC) share price will be on watch on Monday following the release of the banking giant's full year results.
Here is a summary of how Westpac performed during the 12 months ended September 30 compared to the prior year.
- Net interest income rose 6% to $16,505 million.
- Net interest margin (NIM) up 2 basis points 2.11%.
- Statutory net profit up 1% to $8,095 million.
- Cash earnings flat at $8,065 million.
- Cash earnings per share down 1% to 236.2 cents.
- Impairment charge to average loans down 3 basis points to 10 basis points.
- CET1 Ratio increased 7 basis points to 10.63%.
- Final dividend flat at 94 cents per share fully franked.
Given the difficult trading conditions, the Royal Commission, and the bank levy, I thought this was a solid result from Westpac.
According to a note out of Goldman Sachs, it was expecting the bank to post net interest income of $16,288 million, cash earnings of $8,055 million, and declare a final dividend of 94 cents per share.
As you can see above, Westpac has beaten the broker's net interest income and cash earnings estimates and matched its dividend estimate.
What were the drivers of the result?
Westpac's Business Bank segment was the highlight during the period. It delivered an 8% increase in cash earnings thanks to good fee growth, lower impairments, and good margin management.
Not far behind was its New Zealand segment. It achieved a 5% increase in cash earnings during the year. Management advised that the business is performing well after phase 1 of its restructuring. It also reported an increase in margins and a decline in expenses.
The Consumer Bank segment was flat on FY 2017's result. Although it experienced good volume growth, this was offset by margin pressure. These lower margins were due to mortgage spreads and higher funding costs. In addition to this, expenses lifted 5% due to remediation and investment costs.
The BT Financial Group segment was a drag on the bank's performance with a 12% decline in cash earnings. Although it saw growth in insurance and private wealth, this was offset by lower advice revenue and provisions for remediation.
And finally, the Westpac Institutional Bank segment posted a 6% decline in cash earnings. This was due to its revenue being impacted by lower markets income and fewer large transactions. One positive was that its margins were well managed and increased 6 basis points.
Outlook.
CEO Brian Hartzer appeared cautious on FY 2019.
He said: "the outlook for the Australian economy remains positive, although there are likely to be economic headwinds in 2019, with GDP growth expected to moderate to around 2.7%. He said consumers are likely to be more cautious in the face of flat wages growth and a soft housing market, while uncertainty ahead of a Federal election and a less favourable international backdrop are likely to weigh on business investment decisions."
Before adding that: "We expect house prices to cool further, and investor demand to remain weak. On the other hand, demand from first home buyers is holding up. These dynamics are likely to lead to housing credit growth easing to 4% next year, with total credit growth of 3.5%."
Hartzer also revealed that the bank has lifted its productivity target for next year to $400 million "as we continue to simplify our products, digitise our business, and modernise our platforms."
Should you invest?
Although things are far from easy for the banks right now, I still believe they are capable of delivering cash earnings growth over the next few years. In light of this, I think it is well worth considering them if you don't already have meaningful exposure to the sector.
Given the low multiples that its shares trade on and the generous dividend yield on offer, I think Westpac is the best bank to buy right now ahead of Australia and New Zealand Banking Group (ASX: ANZ) and Commonwealth Bank of Australia (ASX: CBA).
