WBC - Westpac

[Snoopy]

2/ If you take the Oz market perspective and regard the price as 'beaten down', then now looks to be a good time to buy for a recovery. The problem is, how much 'historical growth premium' is built into the WBC share price? I am forecasting a small drop in dividend yield in my modelling ($1.68 annual dividend average going forwards, a drop from last year's $1.88). I reckon even this reduced dividend justifies the $A38.30 share price. So I don't see much medium term risk here. Buy for the dividend and maybe even some share price recovery in this circumstance.

Old, but nevertheless relevant news from the back of the AFR of June 6th and the article "Bad debts will amplify Bank tax"

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On Monday (5th June) the gross yield for Westpac Banking Corporation was in excess of 9%. After being asked about these juicy yields, one fund manager who owns zero bank stocks said

"A lot of people look at the yields of the banks relative to the cash rate of 1.5%. Sure it is a relatively big number. But it is all about the quality of the yield." "The market feels that these bank stock yields are unsustainable."


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Westpac Banking Corp., which is respected amongst its peers for the quality of its credit management provides some useful numbers. The best ratio for measuring impairments is impairment charges to gross loans and advances. This is expressed in basis points.

In year to September 30 2007, when good times were prevailing in Australian banking, Westpac's impairment charge was 19 basis points. It rose to 32 basis points in 2008 and hit 75 basis points in 2009. That was the highest level experienced by Westpac since its near death experience in the early 1990s. In the half year to March this year , Westpac's impairment charge rose 1 basis point to 15 basis points. That tells you the bank is experiencing very benign credit conditions.

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It would not be unreasonable for investors in bank stocks to assume that the bad and doubtful charge will over the next five years rise to about 30 basis points. That would be a reversion to the mean which is a typical occurrence in financial and commodity markets.

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Australia's major banks have recently enjoyed the most benign asset quality conditions seen in the industry for about a decade. This cannot continue indefinitely. The prospect of an end to 26 years of uninterrupted economic growth in Australia will put a different complexion on Morrison's bank tax (0.6% on the value of bank loans to customers) . It could well be the catalyst for lower dividends and another round of capital calls on bank shareholders.

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SNOOPY