The Westpac Banking Corp (ASX: WBC) share price closed at $27.22 on Tuesday, 0.93% higher for the day and up 17.94% in the year to date.
As FY24 nears its close, let's look at what lies ahead for this ASX 200 bank share.
State of play: Earnings down, but dividends up
The last round of price-sensitive news we received from Westpac was its mid-year report last month.
The Westpac share price received a boost on 6 May when the company released its half-year results.
For the six months ended 31 March, Westpac's net operating income declined 4% year over year to $10,590 million compared to the prior corresponding period (pcp).
This reflected a flat net interest income of $9,127 million, a 23% decline in non-interest income to $1,463 million, and an 8% increase in operating expenses to $5,395 million.
The net interest margin (NIM) came in at 1.89%, down seven basis points.
Bottom line: Net profit fell 16% pcp to $3,342 million.
However, ASX investors appeared impressed by the 7.1% increase in the interim dividend to 75 cents per share, plus a fully franked special dividend of 15 cents per share.
The bank also announced an extra $1 billion for its ongoing share buyback program.
Looking ahead, CEO Peter King said he was positive about the outlook.
Amid an increase in loan book stress, King said the bank had a strong balance sheet and was "in a good position to help customers".
He said the bank believed the economy was "on track for a soft landing". However, he noted that inflation was proving sticky and it was "likely interest rates will stay higher for longer".
What's happened to the Westpac share price?
The Westpac share price is up 28.7% over the past 12 months.
Like other ASX 200 bank shares, Westpac has had a particularly great run since November 2023. That's when speculation of interest rate cuts began.
Valuation is one of the reasons why top broker Goldman Sachs has just downgraded Westpac shares.
Looking ahead…
Goldman analysts Andrew Lyons and John Li downgraded Westpac shares from a neutral to a sell rating in May. Their 12-month share price target for Westpac is $24.10.
In a new note, the analysts gave three main reasons for the downgrade.
Firstly, Lyons and Li discussed Westpac's technology simplification plan, dubbed the UNITE program.
Westpac says UNITE will be a "major driver to close the cost-to-income ratio gap to peers". It would also improve customer service, make things easier for staff, and lift shareholder returns.
The plan is expected to cost $1.8 billion in FY24 and about $2 billion per annum from FY25 to FY28. This represents about 30% of the bank's total investment spend from FY24 to FY28.
Last month, King said they had started work on 14 initiatives. These include simplifying customer and collections systems.
Lyons and Li said the plan "comes with a significant degree of execution risk, given historically banks' large-scale transformation programs have struggled to stay on budget, and we are currently operating in a stickier-than-expected inflationary environment".
The Reserve Bank confirmed this yesterday when it announced that interest rates would remain on hold.
In a statement, the RBA said inflation was falling, "but the pace of decline has slowed" and "the process of returning inflation to target is unlikely to be smooth".
Lyons and Li said Westpac's second challenge for FY25 was that it's the most exposed to Australian housing.
In their view, "… the relative outlook for system housing lending is likely to be constrained by an already full[y] indebted household".
Australia has the second-highest household debt in the world (behind Switzerland) at 110% of gross domestic product (GDP). This is largely due to expensive home loans, which have resulted from decades of fairly consistent property price growth.
Property prices have continued to rise in most capital city and regional markets over the past 12 months. Rising prices make finance harder to get. Banks apply an APRA-imposed 3% serviceability buffer to their loan rates when assessing whether applicants can afford the repayments.
So, on a 6% loan, Westpac and other banks are assessing borrowers at a 9% repayment rate. This is making it tough for Australians to get new home loans, particularly in the more expensive markets.
It's little wonder buyers are flocking to the smaller, more affordable capital cities these days.
Finally, Lyons and Li pointed out that the Westpac share price is trading on a 12-month forward price-to-earnings (P/E) ratio that is one standard deviation above its 15-year historical average.
Goldman has a 12-month share price target of $24.10 on Westpac. This implies a potential 11.5% downside for investors who buy the ASX 200 bank stock today.
