The Westpac (ASX: WBC) profit has fallen 71%, is the share price a buy?
What is Westpac?
is one of Australia’s ‘Big Four’ banks and a financial-services provider headquartered in Sydney. It is one of Australia’s largest lenders to homeowners, investors, individuals (via credit cards and personal loans) and business.
Westpac’s profit result
Westpac reported its FY20 half year result this morning. It didn’t make for great viewing.
The major bank said that its cash earnings fell 70% to $993 million. Excluding notable items, like the AUSTRAC penalty provision, profit was still down 44% to $2.28 billion.
Statutory net profit was down by 62% to $1.19 billion.
Westpac included an impairment charge of $2.24 billion, which was up $1.9 billion including the potential impacts of COVID-19.
Despite all of the above, the bank managed to increase its net interest margin (NIM) to 2.13%, up by 0.01%. It’s a key profit measure for how much banks make from lending out the money they themselves have borrowed.
Westpac said that Australia faces a sharp economic contraction in 2020 with its economists forecasting the unemployment rate will reach 9% in June – but it would have been much higher without the Jobkeeper payment. By the end of year unemployment is forecast to have improved to 7%.
The major bank has seen business and consumer confidence fall sharply. House prices are expected to fall through the rest of 2020, reversing the recent recovery, particularly in Melbourne and Sydney.
However, it’s not all bad news – Australia’s exports are expected to benefit from the recovery of the Chinese economy. But international travel restrictions could hurt tourism and foreign student numbers.
Is Westpac safe?
The major bank reported that its common equity tier 1 (CET1) capital ratio was 10.8%.
Westpac CEO Peter King said: “Westpac’s balance sheet remains strong. Customer deposits were up $19 billion over the half, more than the loan growth which increased by $5 billion. The deposit to loan ratio is now over 75%.”
Despite the tough operating environment, Westpac believes it’s well capitalised with ample liquidity to continue to support its customers.
Westpac dividend
The Westpac board has decided to defer the decision just like ANZ (ASX: ANZ).
The Board recognises the uncertain economic conditions and how these may develop over the next six months. APRA’s suggestion of being prudent on dividends was also taken into a account. APRA hasn’t said it’s concerned about Westpac about its capital position.
Westpac is looking to improve capital utilisation across the Group. The major ASX bank is doing a strategic review of its specialist businesses to consider further ways to optimise capital.
Is the Westpac share price a buy?
Before today’s share price movement, which is likely to be down broadly across the market, the Westpac share price was already down 40%. So investors knew a bad result was coming. Will they have expected it would be this bad with no dividend payment (for now)? We’ll see what happens with the market.
Australia’s big ASX banks recovered strongly after the GFC, but this is going to be different. I don’t think the banks are a long term buy, low interest rates could be tough for profit margins for some time. I’d much rather invest in these ASX technology shares:
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Disclosure: at the time of publishing, Jaz does not have a financial interest in any of the companies mentioned.
