Westpac shares rally on the back of December quarter result

The share price of Australia’s oldest bank and second-largest lender is up more than 5% since Monday morning, Westpac's (ASX: WBC) best couple of sessions in months. This follows the bank’s release of its results for the December quarter. Some of the highlights included:

• A better-than-expected net interest margin of 1.8%,
• Net profit of $1.6 billion (around 5% higher than the market expected), and
• CET1 ratio of 12.3%, above the 11%-11.5% range management anticipated (CET1 measures banks’ ability to withstand financial distress).

The NIM stands out because of ongoing cost pressures – driven by tough economic conditions and the big four banks’ ongoing fierce competition on mortgages and deposits – which were emphasised in Commonwealth Bank’s (ASX: CBA) half-yearly result handed down last week.

What the brokers think

Macquarie: “A step in the right direction”

• Rating: Maintained OUTPERFORM
• Price target: $25

Macquarie brokers expect Westpac’s NIM figure will “give the market some confidence in the revenue outlook.”

“We note that the rate hike in November and replicating portfolio benefits can skew numbers in one quarter, and we expect margins to decline in 2Q24 and 2H24. However, we forecast WBC to benefit more than peers from its replicating portfolio, given less of its benefits have been captured to date,” Macquarie said.

Overall, Macquarie regards the result as 6% ahead of its forecast, driven by elevated treasury income that was about $70 million above uplift "normal" levels and lower impairment charges.

“On an underlying basis, the result was largely in line. Given its recent history of earnings misses, we see an in-line result as a step in the right direction likely driving consensus upgrades.”

Macquarie has also lifted its Westpac earnings estimate for FY24 by 3% on the back of the stronger treasury income and lower impairment charges.

“We are underweight the sector and currently see banks as expensive, particularly in the context of falling pre-provision earnings. WBC is our preferred exposure within the majors given its less demanding valuation and already subdued earnings expectations.”

Citi: “Better than the market expected”

• Rating: Maintained NEUTRAL
• Price target: $22.25

Citi’s analysts Brendan Sproules, Thomas Strong, and Akshat Agrawal note Westpac’s 1.8% NIM, down only one basis point from the prior quarter, was in line with their expectations. But they believe it is better than the market expected.

“This likely reflects the decline in the spread between front-book and back-book mortgage pricing. Also, this could imply deposit headwinds are not as strong in the December quarter compared to peers,” said the Citi analysts.

Sproules, Strong and Agrawal also emphasise the CET1 ratio, which was better than the 12.06% they had expected, driven by unexpected falls in both credit and interest rate risk in the banking book (IRRBB) risk-weighted assets.

Morgan Stanley: Lower impairments, higher profit

• Rating: Maintain UNDERWEIGHT
• Price target: $21.70

Morgan Stanley equity analyst Richard E. Wiles and research associate Sally Hong, CFA, said the NIM figure was in line with their expectations: “The cash margin ex-notable items fell only -1bp (as the contribution from treasury and markets was up +3 basis points)”.

On credit quality: “Arrears increased as expected, but watch list and substandard loans were lower,” said the Morgan Stanley analysts. The impairment charge of $189 million, representing around 0.1% of Westpac’s loans, slightly undercut Morgan Stanley’s forecast of $200 million.

“Cash profit and pre-provision profit were both around 3% ahead of our forecasts. Revenue and capital were better than our estimates, while expenses and impairment charges were in line,” said Wiles and Hong.

Westpac shares traded at $25.90 when the market closed on Tuesday 20 February.