Westpac’s WBC first-half fiscal 2025 cash profit eased 4% from second-half fiscal 2024. Revenue was flat, net interest margins softer, while operating expenses and loan impairment expenses increased. Higher expenses are largely due to adding bankers and ramping up its simplification project, Unite.

Why it matters: Westpac has momentum in consumer and business lending, but earnings missed our expectations, and we cut our fiscal 2025 profit forecast 5%. Our medium-term forecasts, including a modest NIM improvement and lower cost/income ratio, stand.

  • NIM slipped 4 basis points to 1.92%. The negative impact from product switching out of transaction accounts and competitive term deposit and saving pricing lingered. We expect pricing competition on deposits to ease as nonmajor banks look to lift subpar returns on equity.
  • The cost/income ratio rising to 51.8% is not ideal, but likely temporary as the bank eventually reduces headcount, big project spending completes, and technology investments yield benefits. We forecast a 46% cost/income by fiscal 2029.

The bottom line: We retain our AUD 29 fair value estimate for wide-moat Westpac with shares modestly overvalued.

  • On a forward P/E of 16 times and fully franked dividend yield of 4.7%, we don’t see a sufficient margin of safety given modest earnings growth and potential credit stress, margin competition, or technology simplification risks.

Key stats: The interim fully franked dividend is flat at AUD 0.76 per share, at the top end of the 65%-75% payout range. Given the surplus capital position, with common equity Tier 1 ratio at 12.2% or 12% on completion of the current on market buyback, we view the dividend as maintainable.

  • Credit quality is sound. Loan impairment expense/average loans of 0.06% well below our medium-term expectation of 0.17%. Home loan arrears declined to 0.86%, down from 1.12% six months prior, with 30-day arrears also trending down.

Westpac loan growth resumes but more efficiency improvement required

Westpac Bank is the second-largest of Australia’s four major banks. The bank provides a range of banking and financial services to retail and business customers, including mortgages, consumer finance, credit cards, business loans, and term deposits. Most nonbanking units have been divested, including general, life, and mortgage insurance.

Westpac’s multibrand strategy owes to acquisitions, such as St. George Bank in 2008, to provide access to a broader customer base and add scale. Only recently has Westpac began colocating branches and building IT systems which allow any customer to be served in any branch. A focus on digital channels to improve the customer experience are required to remain competitive, and have the potential to lower the cost base.

The main current influences on earnings growth are modest credit growth and intense competition limiting margin upside despite the cash-rate environment rising swiftly from near zero. As the cash rate begins to fall, pressure will be on banks to moderate how aggressively they discount new loans and offers on savings and term deposits. Operating expenses should rise modestly as the bank resets its cost base after completing a number of remediation and technology projects. The bank has suffered from slow approval times in home lending, but increased resources and digital investments have improved service levels.

After enjoying super-low impairment charges pre-2020, we expect a return to midcycle levels around 0.17% in fiscal 2029. There is a risk of higher losses in the short term as households and business face a material increase in interest costs, but our base case is that only a small percentage will default.

Westpac bulls say

  • A higher cash rate environment gives customer deposit funding banks an opportunity to expand margins and drive higher return on equity.
  • Cost and capital advantages over regional banks and neo-banks provide a platform to win back market share.
  • Consumer banking provides earnings diversity to complement the more volatile returns generated from business and wholesale banking activities.

Westpac bears say

  • Slow core earnings growth resurfaces because of low loan growth, margin compression, subdued wealth and markets income, lower banking fee income.
  • Increasing pressure on stressed global credit markets could increase wholesale funding costs.
  • The bank failing to reset the cost base would leave it at a large disadvantage to peers when it comes to operating efficiency and ROE.

Get Morningstar insights in your inbox

Terms used in this article

Star Rating: Our one- to five-star ratings are guideposts to a broad audience and individuals must consider their own specific investment goals, risk tolerance, and several other factors. A five-star rating means our analysts think the current market price likely represents an excessively pessimistic outlook and that beyond fair risk-adjusted returns are likely over a long timeframe. A one-star rating means our analysts think the market is pricing in an excessively optimistic outlook, limiting upside potential and leaving the investor exposed to capital loss.

Fair Value: Morningstar’s Fair Value estimate results from a detailed projection of a company’s future cash flows, resulting from our analysts’ independent primary research. Price To Fair Value measures the current market price against estimated Fair Value. If a company’s stock trades at $100 and our analysts believe it is worth $200, the price to fair value ratio would be 0.5. A Price to Fair Value over 1 suggests the share is overvalued.

Moat Rating: An economic moat is a structural feature that allows a firm to sustain excess profits over a long period. Companies with a narrow moat are those we believe are more likely than not to sustain excess returns for at least a decade. For wide-moat companies, we have high confidence that excess returns will persist for 10 years and are likely to persist at least 20 years. To learn about finding different sources of moat, read this article by Mark LaMonica.

Uncertainty Rating: Morningstar’s Uncertainty Rating is designed to capture the range of potential outcomes for a company. An investor can think of this as the underlying risk of the business. For higher risk businesses with wider ranges of potential outcomes an investor should consider a larger margin of safety or difference between the estimate of what a share is worth and how much an investor pays. This rating is used to assign the margin of safety required before investing, which in turn explicitly drives our stock star rating system. The Uncertainty Rating is aimed at identifying the confidence we should have in assigning a fair value estimate for a stock. Read more about business risk and margin of safety here.