Target Price: $34.60 | May 1, 2025
Price used for report: $31.72 |
Investor Profile Snapshot
| INCOME | VALUE | GROWTH | QUALITY | THEMATIC |
|---|---|---|---|---|
| ★★★★ 85% | ★★★ 70% | ★★★ 65% | ★★★★ 80% | ★★★ 70% |
Note: This report provides analysis and commentary based on public information and is not intended as investment advice. Investors should conduct their own research and consult with financial advisors before making investment decisions.
Latest Update - FY2024 & Q1 FY2025 Key Takeaways
- Cash earnings fell 3% to $6,990 million as segment performance varied widely
- Business & Wealth emerged as growth engine with profit up 13% and lending growth 1.3x system
- Consumer banking struggled with profit down 17% and mortgage growth at 0.8x system
- Successful completion of CORE risk management program with APRA reducing operational risk capital overlay from $1bn to $500m
- UNITE technology transformation program launched with full benefits expected by 2028
- Strong capital position (CET1 12.49%) supporting increased dividends (151c, +6%), special dividend (15c), and $2bn share buyback
- Expense-to-income ratio increased to 50.7% (vs. peers in mid-40s), representing primary improvement opportunity
- Credit quality metrics showed deterioration with mortgage 90+ day delinquencies up 24bps to 1.05%
What's Changed?
- Leadership Transition: Anthony Miller to succeed Peter King as CEO effective December 16, 2024
- Risk Management: CORE program completed with APRA reducing operational risk capital overlay by $500m
- Technology Transformation: UNITE program launched with 39 of 60 initiatives commenced (only 2 completed)
- Segment Divergence: Business & Wealth outperformance (profit +13%) vs Consumer struggles (profit -17%)
- Shareholder Returns: Ordinary dividend increased 6% plus 15c special dividend and $2bn share buyback
- Credit Quality: Early signs of stress with mortgage delinquencies up 24bps to 1.05%
Executive Summary
Westpac Banking Corporation delivered a solid performance in FY2024 despite challenging economic conditions, with net profit of $6,990 million, down 3% year-on-year. This result highlighted significant divergence across segments, with the Business & Wealth division emerging as the key growth engine, delivering 13% profit growth and above-system lending (1.3x), while Consumer banking struggled with profit down 17% and below-system mortgage growth (0.8x).
The bank has successfully completed its CORE risk management transformation program, evidenced by APRA's reduction of the operational risk capital overlay from $1 billion to $500 million. This achievement marks an important milestone in addressing historical governance challenges and provides a strong foundation for future growth. Management has now launched the UNITE technology transformation program, a multi-year initiative running through 2028 that aims to address Westpac's elevated expense-to-income ratio of 50.7% (compared to peers in the mid-40s).
Balance sheet growth remained solid with loans expanding 4% to $807 billion and deposits increasing 5% to $674 billion, improving the deposit-to-loan ratio to 83.5%. The bank's strong capital position (CET1 ratio of 12.49%) supported enhanced shareholder returns through increased ordinary dividends (151 cents, +6%), a 15-cent special dividend, and $2 billion in announced share buybacks.
Credit quality metrics showed some deterioration with mortgage 90+ day delinquencies rising 24bps to 1.05%, reflecting economic pressures on households, though impairment charges remained low at 7bps of average loans. Westpac maintains strong provisioning with $5.1 billion in total provisions including $4.5 billion in collective provisions, providing a buffer of $1.5 billion above expected losses.
Westpac will undergo a leadership transition in December 2024, with Anthony Miller succeeding Peter King as CEO. Miller's internal promotion from the successful Business & Wealth division provides strategic continuity as the bank navigates its technology transformation journey.
Financial Highlights
| Key Metric | FY2024 | FY2023 | Change |
|---|---|---|---|
| Net interest income ($m) | 18,753 | 18,317 | +2% |
| Non-interest income ($m) | 2,835 | 3,328 | -15% |
| Net operating income ($m) | 21,588 | 21,645 | 0% |
| Operating expenses ($m) | 10,944 | 10,692 | +2% |
| Impairment charges ($m) | 537 | 648 | -17% |
| Net profit after tax ($m) | 6,990 | 7,201 | -3% |
| Basic earnings per share (c) | 200.9 | 205.3 | -2% |
| Ordinary dividend per share (c) | 151 | 142 | +6% |
| Special dividend per share (c) | 15 | - | n/a |
| Net interest margin (%) | 1.93 | 1.95 | -2bps |
| Expense to income ratio (%) | 50.69 | 49.40 | +129bps |
| Return on tangible equity (%) | 11.01 | 11.39 | -38bps |
| CET1 ratio (%) | 12.49 | 12.38 | +11bps |
Segment Performance
| Segment | YoY Profit | YoY Revenue | Key Developments |
|---|---|---|---|
| Consumer | -17.4% | -8.3% | Below-system mortgage growth (0.8x); NIM compression (-18bps); delinquencies up to 1.12% |
| Business & Wealth | +12.9% | +9.8% | Above-system lending growth (1.3x); NIM expansion (+18bps); platform FUA up 11% to $150.8bn |
| WIB | +2.2% | -0.7% | Loan book up 9% to $100.6bn; NIM compression (-6bps) primarily in trading securities |
| New Zealand | +9.6% | +2.1% | NIM expansion (+4bps); loan growth 3%; impairment charges significantly reduced |
Key Outlook Points
| Category | Current/Near-Term | Medium-Term | Long-Term |
|---|---|---|---|
| Revenue Growth | 🟨 +2.7% in FY25 | 🟨 +3.5-3.9% in FY26-27 | 🟩 +4.1-4.4% in FY28-29 |
| Expense-to-Income | 🟥 50.4% in FY25 (minimal improvement) | 🟨 Improving to 48.5% by FY27 | 🟩 Further improving to 46.1% by FY29 |
| UNITE Benefits | 🟥 Limited in FY25-26 | 🟨 Accelerating in FY27 | 🟩 Full realization of ~$1bn annually by FY28-29 |
| Credit Quality | 🟨 Impairment charges rising to 9-11bps | 🟨 Normalizing at 13bps by FY27 | 🟨 Stable at 13bps through FY28-29 |
| ROE/ROTE | 🟨 ROTE 11.1% in FY25 | 🟨 Gradually improving to 11.6% by FY27 | 🟩 Reaching 12.0% by FY29 |
| Segment Performance | 🟨 Continued divergence (Business strong, Consumer weak) | 🟨 Gradual Consumer recovery | 🟩 Balanced contribution across segments |
Color Key:
- 🟩 Positive for the company
- 🟨 Neutral or moderate
- 🟥 Challenging or negative
Valuation Summary
Our analysis derives a base case valuation of $34.60 per share, representing 9.1% upside to the current price of $31.72. This valuation reflects the potential benefits from successful execution of the UNITE technology transformation program, continued strength in Business & Wealth, and gradual recovery in Consumer banking.
| Methodology | Implied Price Per Share |
|---|---|
| DCF - Base Case | $34.60 |
| DCF - Bull Case | $39.75 |
| DCF - Bear Case | $27.40 |
| P/E Multiple - NTM | $33.83 |
| P/B Multiple | $31.78 |
| PEG Ratio (P/E to Growth) | $32.50 |
| Implied Valuation Range | $29.50 - $36.00 |
| Current Share Price | $31.72 |
| Up/Downside to Base Case | +9.1% |
Our Bottom Line
Westpac's FY2024 results demonstrate the bank's resilience amid challenging conditions, with strong Business & Wealth performance offsetting Consumer banking headwinds. The successful completion of the CORE risk management program represents an important milestone, reducing regulatory constraints and providing a foundation for future growth.
The launch of the UNITE technology transformation program addresses Westpac's primary competitive disadvantage – its elevated expense-to-income ratio of 50.7% compared to peers in the mid-40s. While the program is still in early stages with only 2 of 60 initiatives completed, successful execution would significantly enhance profitability and competitive positioning over the medium to long term.
Segment performance divergence presents both challenges and opportunities. Business & Wealth has emerged as a key growth engine with 13% profit growth and above-system lending expansion. This segment now contributes 33.7% of group profit, providing crucial earnings support during the technology transformation journey. Meanwhile, Consumer banking requires sustained focus to improve its competitive position, particularly in mortgages where growth has been below system at 0.8x.
Credit quality metrics show early signs of stress with mortgage 90+ day delinquencies rising 24bps to 1.05% and total stressed exposures increasing 19bps to 1.45% of total committed exposures. While current impairment charges remain low at 7bps of average loans, we expect gradual normalization toward 13bps as economic conditions continue to pressure households.
The upcoming CEO transition in December 2024 introduces some execution uncertainty, though Anthony Miller's internal promotion from the successful Business & Wealth division should provide strategic continuity. His leadership will be crucial for maintaining UNITE program momentum and addressing Consumer banking challenges.
At the current price of $31.72, Westpac trades at 15.5x forward earnings and 1.4x book value, modest premiums to historical averages justified by improved risk management and strong capital return potential. Our target price of $34.60 represents 9.1% upside as successful execution of strategic initiatives drives gradual ROE improvement from 9.8% to 10.7% over our forecast period.
What to Watch
- UNITE Execution: Progress across the 60 initiatives with particular focus on expense-to-income ratio improvement
- Consumer Banking: Recovery in mortgage growth relative to system and margin stabilization
- Credit Quality Trends: Evolution of delinquencies and impairment charges as economic pressures continue
- CEO Transition: Anthony Miller's leadership priorities and potential strategic adjustments after December 2024
- Capital Management: Ongoing balance between business investment, regulatory requirements, and shareholder returns
Growth Catalysts
- UNITE Benefits: Potential for $1 billion in annual benefits by 2028 as technology modernization drives efficiency
- Business Banking Momentum: Continued above-system growth (currently 1.3x) across target industries
- Wealth Management: Platform funds under administration growing strongly (11% to $150.8 billion)
- Reduced Regulatory Constraints: APRA's reduction of operational risk capital overlay enabling more efficient capital utilization
- New Zealand Recovery: Early benefits from RBNZ rate cutting cycle beginning August 2024
Risk Factors
- Technology Execution Risk: UNITE program complexity with 39 of 60 initiatives commenced but only 2 completed
- Consumer Competitive Position: Continued below-system mortgage growth (0.8x) and margin pressure
- Credit Quality Deterioration: Rising stress indicators including mortgage delinquencies up 24bps to 1.05%
- Leadership Transition: Potential execution disruption during CEO change in December 2024
- Economic Challenges: Persistent cost-of-living pressures and elevated interest rates affecting household finances
Westpac's improved risk management foundation, Business & Wealth momentum, and substantial efficiency opportunity through UNITE provide a compelling medium to long-term investment case. With a strong 4.8% dividend yield and 9.1% upside to our target price, patient investors have potential for attractive total returns as transformation benefits materialize.
Discussion