The Westpac Banking Corp (ASX: WBC) share price will be one to watch on Monday.
This follows the release of the banking giant's full year results this morning.
Westpac share price on watch amid strong profit growth and share buyback
- Statutory net profit up 138% year on year to $5,458 million
- Cash earnings up 105% to $5,352 million
- Cash earnings per share up 102% to 146 cents
- Net interest margin (NIM) down 4 basis points to 2.04%
- Return on equity (ROE) up 372 basis points to 7.6%
- CET1 capital ratio up 119 basis points to 12.32%
- Fully franked final dividend of 60 cents per share
- $3.5 billion off-market share buyback
What were the drivers of this result?
Westpac's Consumer business performed positively in FY 2021, reporting a 12% increase in cash earnings to $3,081 million. This was driven largely by an impairment benefit of $125 million compared to a charge of $1,015 million in FY 2020. In addition, mortgages increased $19.1 billion or 5% over the year but margins decreased 3bps driven by competitive pricing to attract and retain customers, portfolio mix effects, and a decline in personal lending.
The Business segment delivered a 144% increase in cash earnings to $1,789 million. This was also due largely to an impairment benefit of $484 million, compared to an impairment charge of $1,371 million in FY 2020. Also supporting its result was a $268 million turnaround in notable items. Excluding notable items, net interest income was down $416 million from an 11bp decrease in margins and a 5% decrease in lending.
The Westpac Institutional Bank business was a drag on the company's result, recording a loss of $670 million for FY 2021 compared to a profit of $332 million in FY 2020. Notable items were $991 million (net of tax) and related to the write-down of assets, mostly intangible assets, following an annual impairment test. Excluding this, cash earnings were down $11 million year on year at $321 million.
The Westpac New Zealand business was on form and recorded a 56% increase in cash earnings to NZ$1,013 million. This was primarily driven by a NZ$404 million turnaround in impairment charges. In addition, net interest income benefitted from a 3 basis point increase in margins and lending growth of 5% driven by NZ$5.7 billion of mortgage growth.
Finally, the Specialist Businesses segment return to profit with cash earnings of $193 million. This compares to a loss of $506 million in FY 2020. Management advised that this reflects lower notable items ($382 million net of tax) and an impairment benefit of $66 million compared to an impairment charge of $255 million in FY 2020.
Management commentary
Westpac's CEO, Peter King, was pleased with the bank's performance during another challenging year
He said: "2021 has been another challenging year, with a focus on continuing to support customers and employees through the pandemic, while implementing our Fix, Simplify and Perform strategic priorities."
"Cash earnings rose, the balance sheet remains strong, and I am pleased with the progress we are making to transform Westpac into a simpler, stronger bank. Credit quality has remained remarkably good with stressed exposures continuing to decline off last year's peak, while mortgage 90+ day delinquencies were also significantly lower."
"A turnaround in impairment charges and lower notable items were the main drivers of our improved earnings, while we also restored growth in mortgages and have begun to see better momentum in our institutional and business portfolios. While notable items were lower, they remain elevated as we continue to work on fixing our issues and simplifying our business," he added.
Share buyback
Potentially giving the Westpac share price a boost today is news that it plans to undertake an off-market buyback of up to $3.5 billion of shares.
Westpac Chairman, John McFarlane, commented: "Our improved operating performance and positive progress on our strategic priorities, including the completion of a number of divestments, have strengthened capital and allowed us to announce this Buy-Back. The Board carefully evaluated several options and believes this is the most value-enhancing option to distribute part of the Group's capital and franking credits."
The share buyback will be conducted by an off-market tender process which will open on 17 November and close on 17 December.
Shareholders will be able to offer to sell their shares at specified discounts to the market price of between 8% to 14% inclusive (at 1% intervals) and/or as a final price application. The latter is where you simply elect to receive the buyback price determined through the tender process.
Westpac notes that the capital component will be $11.34 per share, subject to ATO approval. Whereas the dividend component will be the buyback price less the capital component.
Outlook
Westpac's CEO appears cautiously optimistic on the future, noting that he is confident the Australian economy will rebound over the next 12 months.
He said: "The recent lockdowns in NSW, Victoria and the ACT have been difficult for many businesses, and while uncertainty in the outlook remains, I am confident most industries will begin to recover as Australia's two biggest states re-open. Consumer spending will likely increase significantly as states re-open and pent-up demand is released, particularly supported by consumer optimism and sizeable savings. We expect the Australian economy to expand by 7.4 per cent in 2022, with credit growth expanding 6.8 per cent. Demand for housing is likely to remain elevated but home price increases should moderate to 8 per cent next year."
"Next year we expect to reduce our cost base as we head towards our $8 billion cost target from completion of programs under our Fix priority and realise the benefits from divestments. We have made considerable progress in improving our mortgage and business banking performance, driven by streamlining of lending processes to create a better customer experience. This sets us up to maintain momentum in the year ahead," he added.
"For our business, loan growth is expected to be sound as the economy rebounds, although net interest margins will remain under pressure from low interest rates and competition. We are also committed to resolving a number of outstanding regulatory issues where our actions were not good enough. We are making progress in strengthening risk management, growing our core franchise, and simplifying the bank, which provides a strong platform to deliver a better service to customers, as well as returns for shareholders," Mr King concluded.
The Westpac share price is up 31% year to date.
