Westpac shares charge higher on half-year earnings beat and buyback

Investors are loving this bank's half-year results release. But why?

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Westpac Banking Corp (ASX: WBC) shares are charging higher on Monday.

In morning trade, the banking giant's shares are up almost 2% to $26.90.

Why are Westpac shares charging higher?

Investors have been buying the bank's shares this morning after responding positively to its half-year results release.

For the six months ended 31 March, Westpac posted a 4% year on year decline in net operating income to $10,590 million compared to the prior corresponding period. This reflects flat net interest income of $9,127 million and a 23% decline in non-interest income to $1,463 million.

On the bottom line, the bank's net profit before one-offs came in at $3,506 million. This represents an 8% decline on the prior corresponding period and a 1% fall on the second half of FY 2023.

Despite its weaker profits, the Westpac board surprised the market with a decent dividend increase, a special dividend, and an increase to its on-market share buyback.

The bank has increased its fully franked interim dividend by 7.1% to 75 cents per share, declared a special fully franked dividend of 15 cents per share, and added $1 billion to its ongoing share buyback.

Broker reaction

Analysts at Goldman Sachs have responded positively to the results release. They said:

WBC reported 1H24 cash earnings ex notables of A$3,506 mn, which was up +12% hoh and +1.7/+1.6% higher than GSe/Visible Alpha Consensus Estimates (VAe), driven by lower than expected BDDs, which came in c.10% lower than expected. PPOP was broadly in line with GSe but +1% higher than VAe.

Goldman also notes that the bank's shareholders' returns were ahead of expectations. It adds:

WBC's 1H24 CET1 ratio of 12.5% (globally harmonised CET1 18.6%) was up 17 bp in the half and 11 bp better than our estimate. The interim 2024 dividend of 75¢ was 3¢ higher than GSe (72¢), bringing the interim ordinary payout ratio to 74% (ex-notable items), and the DRP (for both the ordinary and special dividends) will be done with no discount, with shares to be neutralized via an on-market buyback. WBC reiterated its sustainable payout ratio range to 65-75% of NPAT ex-notables.

And while the broker was forecasting another share buyback, it was twice the size as it was predicting. It said:

As a result of the strong capital position, WBC topped up its on-market buyback by A$1.0 bn (GSe had an additional A$0.5 bn vs. current announced), as well as a 15¢ special dividend. The buyback and special dividend will reduce WBC's CET1 ratio by 0.49%, leaving its pro-forma CET1 ratio of 12.06%, still well above the top end of its target range of 11.0-11.5%.

Is the bank a buy?

As things stand, Goldman has a neutral rating and a $23.71 price target on Westpac's shares. Though, this could change once it has updated its financial models.

Motley Fool contributor James Mickleboro has positions in Westpac Banking Corporation. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended Goldman Sachs Group. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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