Investment view
Turnaround strategy key to share price re-rating: WBC offers value over the medium term if the ‘fix, simplify, and perform’ strategy can be delivered. In our view, WBC is the laggard of the major banks in addressing regulatory, governance, and cultural issues that have hung over the sector. After a slow start, particularly on costs, it now looks like the Bank is serious about addressing challenges and optimizing the portfolio.
Ambitious cost target, not reflected in market estimates: Both ANZ and NAB walked away from cost targets in May 2022, citing the higher inflation environment. In contrast, WBC stuck with its $8bn cost base in FY24E.q This implies a ~15% reduction in the cost base, which looks aggressive given peers will likely see 5-7% increases.
The market currently assumes WBC’s costs base will be ~$9bn in FY24E. Normalised earnings/valuation multiples imply an early $30 share price: WBC’s return on equity (ROE) has fallen from 12% to 8% over the last 4 years. The market currently assumes WBC’s ROE will return to 10%, on a flat margin assumption into FY24E. Better than expected margins would imply double-digit earnings upside risk to market forecasts, potentially opening the pathway back to ~12% ROE. A 12% ROE and applying a 15x PER multiple (WBC peak multiple post-GFC) implies a WBC share price in the early $30s.
Returning to dividend growth. Consensus has WBC growing dividends on average +8% per year into FY24E, the second-highest of the majors. This should be well received after dividends have shrunk since 2015 for the majors (asset sales and lower earnings).
WBC is currently trading on a forward dividend yield of 5.1% Best in sector EPS growth = closing of management discount: market currently assumes that WBC will have the strongest EPS growth of the majors into FY24E. Evidence of earnings growth should reduce the current investor focus on management credibility and execution which currently weigh on the WBC share price.
Buy recommendation on turnaround and attractive valuation: WBC is emerging from a period of intense regulatory pressure and management change. With scope for both EPS and ROE improvement, we see a pathway for the WBC share price to move higher over the next 12-18months.
Risks to investment view
Upside risks relate to better-than-expected cost control, mortgage repricing leading to stronger margins, and stabilisation of market share losses. Additional capital management initiatives would also be well received.
Key downside risks include further deterioration in interest margins, intensifying lending competition, material slowing in credit growth, delayed resumption of dividend growth, and poor execution of the turnaround strategy. A significant and rapid fall in house prices would present a risk to the share price.
