Price movement
Westpac’s price
seems to have found support in the
$13 region, well below its $17 alltime
high a year ago. During this
time the bank has undertaken
three strategic transactions that
are expected to change the
composition of earnings. However,
poor financial market conditions
have focused the valuations of all
banks’ earnings profiles, especially
the funds management operations.
The Commonwealth Bank has
recently written down the value of
its Colonial Funds Management
business and the market has put
the microscope on Westpac’s
similar acquisitions.
Profile
As a bank it provides
traditional banking and financial
services for individuals and
corporations and is also following
the other leading banks into funds
management (wealth management).
Its businesses are in four main units:
retail financial services, institutional
banking, Westpac Trust (New
Zealand) and funds management.
Apart from its known domestic
Westpac Bank branch network, it
owns the Bank of Melbourne and
the Challenge Bank (Western
Australia) and has a network of
institutional branches throughout
the world’s leading cities.
Current details
The composition of
the bank’s profits is from personal
banking (53 per cent), corporate
banking (36 per cent) and wealth
management (11 per cent). Three
key transactions during the past
year are aimed at altering this mix
from consumer lending to wealth
management. Last April it
purchased Rothschild Australia
Asset Management, which was
followed up by the purchase of the
BT Financial Group in August for
$900 million. The disposal of AGC
(consumer finance) for a net profit
of $754 million helped fund the BT
acquisition.
The sale of AGC has created an
earnings hole that needs to be
replaced. The market is
questioning the ability of the new
acquisitions to make up this gap.
This switch in strategy now
appears risky considering that the
BT Group has experienced a drop
in funds under management from
$37 billion to $24 billion during the
past three years.
Sector
Until recently all banks’
share price gains and earnings
growth have been driven by rising
housing prices, the first-home
owners grant, falling corporate tax
rates, capital returns to
shareholders (via share buybacks)
and cost cutting (branch closures).
Future economic conditions look
threatening for the banking
sector’s profitability. The drought
will no doubt result in a large
number of non-performing rural
loans. The housing and residential
property market is topping out and
the heavy investment in funds
management is providing negative
returns. High personal credit card
debt, margin lending and low
consumer confidence will also
undermine retail banking profits.
Worth buying?
The portents for a
deteriorating global economic and
political climate and the
concomitant weakness in consumer
confidence would suggest there are
greater downside share-price risks
than upside potential. This capital
risk needs to be compensated by a
higher dividend yield. A dividend
yield of 6 per cent (assuming a 70
cent dividend) would imply an
$11.50 share price. SELL.
Geoffrey Hill is presenter of ABC
News Radio’s daily afternoon
finance report and is an
independent private client adviser.
Email gh@ghill.com.au
