WBC Analysis: Westpac FY2025 Full Year Results
To reiterate: This WBC version is correct. Disregard the other, earlier one.
Event: Westpac FY2025 Full Year Results | Date: 2025-11-03 | Source: ASX Company Announcements
Westpac Delivers Mixed FY2025 Results with Profit Decline Amid Cost Pressures
Westpac Banking Corporation released its full-year financial results for the period ended 30 September 2025, reporting a net profit after tax of $6.9 billion, representing a 1% decrease from the prior year. Key highlights included a stable net interest margin of 1.94% for the year, with balance sheet growth driving net interest income up 3.8% to $19,473 million, while non-interest income rose 5.5% to $2,991 million, resulting in total net operating income of $22,464 million (up 4.1%). Expenses increased significantly by 9% to $11.9 billion, reflecting ongoing investments in technology and people, which pressured the cost-to-income ratio to 53.0%. Credit impairment charges remained low at 5 basis points, contributing to the profit outcome, while the CET1 ratio strengthened to 12.53%. The bank declared an ordinary dividend of 153 cents per share, up 1% from FY2024, and completed its $1.0 billion share buyback program. Source: Westpac 2025 Full Year Results Announcement.
Operational Resilience Masks Efficiency Struggles and Cycle Vulnerabilities
Operationally, Westpac demonstrated balance sheet strength with loans growing 5.6% and deposits up 7%, particularly in household segments (+10%), supporting market share stability at 21% in housing. However, the UNITE transformation program showed limited progress, with only 8 of 60 initiatives complete despite $660 million invested in FY2025, contributing to a 230 basis point deterioration in cost-to-income to 53.0%. Credit quality remained benign at 5 basis points of loans, with mortgage delinquencies improving to 0.83%, though this trough level increases vulnerability to normalization. The #1 mobile banking app ranking highlights customer-facing success, but back-end inefficiencies persist, widening the gap to peers like CBA at 43% cost-to-income.
Financially, the results reflect revenue resilience offset by cost inflation, with net operating income up 4.1% but expenses surging 9%, creating negative operating leverage and compressing pre-provision profit margins to 49.3%. Cash generation remained robust, supporting $7.0 billion in shareholder returns, while the CET1 ratio of 12.53% provides a strong buffer for growth or distributions. Recurring items like technology investments drove the expense growth, with no material one-offs, though the low impairment charges represent a temporary tailwind. Working capital dynamics were stable, but capex intensity at 7.8% of revenue signals ongoing pressure on free cash flow if efficiency gains fail to materialize.
Thesis Weakened by Execution Shortfalls and Fair Value Downgrade
The FY2025 results largely confirm our existing concerns about operational execution and credit cycle risks, but the sharper-than-expected cost-to-income deterioration to 53.0% (versus our prior estimate of 51.8%) weakens the investment thesis further, highlighting greater UNITE transformation challenges. We have revised down our fair value estimate by 12% to $23.71 from $27.01, reflecting lowered efficiency assumptions and increased stress scenario probability to 35% from 30%. While deposit growth and CET1 strength align with our forecasts, the expense overrun reduces conviction in medium-term margin recovery, prompting a strengthened "Avoid" recommendation. No changes to rating or positioning, but the update solidifies our view of structural overvaluation at current levels.
Before vs After Snapshot
| Metric | Prior | Updated | Δ | Notes |
|---|---|---|---|---|
| FY26E Net Profit ($m) | 7,475 | 7,192 | -3.8% | Lowered due to higher expense growth and margin pressure observed in FY2025 |
| FY26E NIM (%) | 1.94% | 1.90% | -0.04% | Adjusted for intensified competitive dynamics evident in 1H25 compression |
| FY26E Cost-to-Income (%) | 51.8% | 51.8% | 0% | Confirmed - in line with expectations despite FY2025 deterioration |
| Stress Scenario Probability (%) | 30% | 35% | +5% | Increased to reflect heightened UNITE execution risks |
| Fair Value per Share ($) | 27.01 | 23.71 | -12% | Revised lower incorporating efficiency shortfalls and valuation adjustments |
| Expected Return (3-yr, % p.a.) | -7.8% | -11.2% | -3.4% | Worsened due to lower fair value and increased downside risks |
| FY26E CET1 Ratio (%) | 12.1% | 12.1% | 0% | Confirmed - strong capital position aligns with expectations |
| Terminal ROTE (%) | 11.0% | 11.0% | 0% | Confirmed - in line with conservative equilibrium assumptions |
Watch for UNITE Milestones and Credit Inflection
This update weakens the investment case, as FY2025's execution shortfalls amplify concerns over UNITE delivery and operational leverage, reinforcing our view of structural overvaluation and unfavorable risk-reward. Investors should closely monitor two key items: first, UNITE progress with at least 15 initiatives completed by December 2026 (versus only 8 currently), where failure to meet this would signal deeper transformation issues and warrant further valuation downgrades; second, credit losses rising above 8 basis points by June 2026, indicating cycle normalization that could pressure earnings by $400-500 million annually if provisions accelerate.