Could the Westpac Banking Corp (ASX: WBC) share price be a buy after it revealed that its recovery is on track with a solid first half of FY21?
What to make of the HY21 result
There were a number of things I was hoping to see from Westpac to show things were getting better.
The most important thing was that the impairment situation was getting better. The banks took huge provisions for the potential fallout of COVID-19. But that’s starting to unwind. Instead of an impairment charge, Westpac revealed an impairment benefit of $372 million.
Another important factor was the net interest margin (NIM). It’s a really important metric because it tells investors how much money a bank is making from the loans it lends out, against the cost of funding (such as savings accounts with savers).
The low interest rate environment has made it difficult to maintain profitability, particularly with the intense competition. Westpac said that whilst its NIM had fallen 4 basis points year on year, compared to the second half of FY20 it was actually up by 6 basis points.
Cash earnings jumped 256% to $3.54 billion and statutory net profit went up 189%. Cash profit / earnings per share (EPS) more than tripled to 97 cents. Excluding ‘notable items‘, cash earnings rose 60% to $3.82 billion.
Investing and costs
The big bank also announced that it’s strengthening its focus on costs and announced a three-year plan to reduce costs, so that it can be more streamlined and a simpler organisation with a bigger focus on digital and smaller head office. It expects to invest $3.5 billion to $4 billion over the next three years. To make this happen. Digital operations are an important part of the picture going into the future.
Westpac is targeting an $8 billion cost base by FY24 to materially improve efficiency and costs. Costs will increase in FY21 as it implements its strategy to lower costs and then fall from FY22. I imagine job losses are a significant part of that.
Dividend
The common equity tier 1 (CET1) ratio rose by 153 basis points (1.53%) to 12.34%.
The strength of the balance sheet is one of the main things that supports a good dividend for a bank.
Westpac’s board decided not to pay a dividend a year ago. This time it’s going to pay $0.58 per share. That’s probably music to retiree ears.
If you double that payment for the full year result, that’s a fully franked dividend yield of 4.5%.
Summary thoughts on the Westpac share price
The bank is clearly doing better. I’d be happy as a shareholder to see that things are improving.
However, it’s difficult to say that Westpac is the best investment idea on the ASX right now. It’s good to see that Westpac’s dividend is back. But several other ASX dividend shares are catching my eye more.
