July 15

A Question of Control | Westpac Banking Corporation (WBC) Recommendation

Ord Minnett Research Recommendation:   Westpac Banking Corporation (ASX: WBC)  

Westpac has commenced proceedings in the Federal Court of Australia against Forum Finance Pty Ltd following the discovery of a significant potential fraud.

Limited facts have been provided at this stage, but the alleged fraud appears to have been made possible due to third-party involvement in transactions in which Westpac purchased lease receivables. Westpac said it has a potential exposure of $200m (after tax), although the final amount will depend on the outcome of its investigations and recovery actions.

This disclosure is not particularly material in isolation, but at face value it reflects poorly on Westpac’s internal risk controls. It also comes at a time when the bank is already remediating its systems, following its settlement with Australian Transaction Reports and Analysis Centre (AUSTRAC) for anti-money-laundering breaches, and a number of other conduct issues identified in recent years.

Separately, Westpac announced the sale of its New Zealand life insurance business to Fidelity Life Assurance Company, New Zealand’s largest locally owned life insurer, for NZ$400m (A$373m). As part of the deal, Westpac will enter into a 15-year agreement for the distribution of life insurance products to its New Zealand customers.

Completion of the transaction remains subject to various approvals and is expected to occur by the end of 2021. The bank expects the sale to add 7 basis points to its common equity tier-one ratio.

Westpac’s outlook has improved with a meaningful capital surplus having emerged, and potential for asset sales and improved mortgage performance pointing to better returns. Management’s FY24 cost plan, with an $8bn target, appears highly ambitious given it requires a 17% reduction in the first-half annualised cost base, and we expect the market to remain sceptical about this being achieved. Nonetheless, we believe the current valuation largely captures these factors, with the valuation gap to peers having closed.

In the longer term, we remain concerned about sustainability of mortgage margins across the industry, where Westpac has a heavy exposure. For further upside potential we will look for evidence of execution against the bank’s ambitious cost targets and key customer metrics. We maintain our Hold recommendation with a $27.50 target price.
Walter Watson Research Editor Ord Minnett

Walter Watson

RESEARCH EDITOR

Walter is the Editor of Ord Minnett's retail investor publications, such as the Opening Bell, Ords Weekly and the Ords Monthly, along with various investment guides and investor information published by Ord Minnett.

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WBC, Westpac Banking Corporation


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