Investment view
In contrast to November’s FY21 Results, May’s 1H22 Results showed stabilisation in the margins (ex-volatile markets income) and muchimproved cost performance, with costs down 10% in the half.
Underlying cash earnings were ~10% ahead of the market, and 5% clear once a stronger bad debts outcome is removed. The dividend was 3cps ahead, cementing the view that this was a ‘good’ result.
This result should be enough to help reverse some of the share-price underperformance in WBC since November last year. With improved signs of stronger operating performance and relative valuation appeal, we upgrade our Recommendation on WBC to Buy.
Three key issues in the results;
- Costs. In contrast to both ANZ and NAB, WBC has maintained its medium-term cost-saving target. This is important given WBC has been a laggard on costs, partly because of ongoing regulatory issues. These are now beginning to fade, and should we see further evidence of cost out, there is a material upside to market earnings estimates.
- Margins. Stabilisation in margins ex-trading income suggests we may have seen the worst of the margin compression for WBC. Higher interest rates are likely to benefit margins from here. This benefit should accelerate in 2023/24 as fixed-rate mortgages that became popular in 2020/21 roll-off. Once again, market forecasts across 2023/24 have flat margins for WBC, which we see as now looking quite conservative.
- Capital. WBC has increased its targeted capital levels from 10.5% to 11.0-11.5%. This compares to current capital at 11.5%. In our view, this implies that further capital returns to shareholders are not likely near term. WBC’s pre-announced $2.5bn on-market share buyback will begin in late May.
Risks to investment view
Key risks for WBC;
- inability to extract further costs;
- margin stabilisation/ improvement proves short-lived;
- higher interest rates impacting bad debts and lowering earnings;
- acceleration in investment spend holding back earnings;
- sustained period of house price falls across both Australia/NZ.
Recommendation
We have upgraded our recommendation to Buy.
Overall, these results should give the market some comfort that earnings can improve materially over the 2022-24 period. With WBC the second cheapest of majors on both price-earnings and price to book, we upgrade our recommendation to Buy.
