The Westpac Banking Corp. The annual result (ASX: WBC) split the ASX analysts about the future of the bank. On the one hand, the stockbroker Morgans is optimistic about the Westpac share price and maintains a buy recommendation. On the other hand, Bell Financial Group Ltd. Head of Research (ASX: BFG), TS Lim, believes that Westpac “may have had a near-death experience in the 2020 financial year”. Most analysts, however, have maintained a purchase price for Westpac’s share price. This contains UBS Group AG (NYSE: UBS), who reiterated this as a “buy” with a target price of $ 20.50 after the bank announced what some would call a multi-year turnaround certificate.
While the bank has announced a multi-year turnaround plan, there are a number of headwinds it is working against. For example, the Australian explains how the Reserve Bank of Australia’s further lowering of the cash rate to 0.1% will lower revenue. Meanwhile, non-bank lenders continue to compete with the bank’s core business of mortgages and commercial loans.
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Morgans also saw an average increase in full-time employees (FTE) of 8% between the first and second halves of fiscal 20. However, FTE numbers are expected to decrease as customers leave COVID support. In addition, Westpac CEO Peter King stated that mortgage processing problems had occurred in India and the Philippines due to the pandemic, which resulted in duplication of work. During the webcast of the results, he also announced that jobs will be brought back to Australia, reducing the overall workforce and increasing efficiency.
Small business loans are another problem for the bank. Mr. King noted that there was a high rate of non-response as the six-month grace period expired. He further commented:
“For small businesses, we’re at the end of the six month period. A lot of people state that they will start making repayments, but I want to see it. “
During the presentation, Michael Rowland, Westpac’s CFO, highlighted the negative growth in mortgage loans in both halves of FY 20. Rowland said this was largely due to the problems in offshore call centers in the second half of fiscal 20, as well as the impact the pandemic had on demand. However, these reasons do not explain the decline in the first half of fiscal year 20. Mr. König said:
“Mortgage growth has been a problem for us this year, we haven’t kept up with the market.”
Mr. King and Mr. Rowland both recognized the efforts needed to improve the mortgage business. As part of its multi-year turnaround plan, the bank has invested a lot of money in repairing and simplifying the IT infrastructure and staff. In IT, the company plans to replace human steps with the use of digital and data.
In addition, bad processes were admitted that contributed to the decline in mortgage growth. Indeed, this was also a recommendation by the Hayne Royal Commission on Financial Services. In December 2019, the then CEO of Westpac, Brian Hartzer, resigned. This happened after AUSTRAC applied to the Federal Supreme Court for civil penalties against Westpac for failing to monitor its obligations to combat money laundering and terrorist financing.
At that time, Westpac’s stock was trading at $ 27.17 per share. Today, at the time of writing, it is asking for $ 17.38.
As part of the comprehensive alignment of the company, Mr. King announced a number of additional measures. For example, the bank would simplify the products and services offered to reduce complexity. In addition, the company has decided to move out of non-core businesses and adopt an end-to-end service model for the industry to increase accountability.
The bank is aiming for mortgage growth in line with major banks through the second half of FY21. While the rest of the big four banks are spending on growth, Mr. King spends 47% of his $ 1.7 billion investment bill fixing risk and compliance issues.
One issue that Morgans dealt with, as did Mr King and Mr Rowland, was the CET1 ratio. This measures a bank’s capital by its assets. Westpac has worked over the year to bring that to 11.2%, which Morgans believes is a strong pro forma rate.
In addition, the bank has already seen strong growth in customer deposits. Mr Rowland also spoke of an increasing number of home loan applications but was not yet ready to see it as a positive trend. Importantly, on October 28, Westpac claims it had Australian home loans of $ 16.6 billion on repayment breaks, equivalent to 41,000 accounts. That was a drop of $ 54.7 billion at the height of the pandemic.
Morgans, UBS, Bell Potter and others have maintained a purchase price for the Westpac share price despite the difficult year and multi-year turnaround plan.
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