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Thread: WBC - Westpac

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  1. #1
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    Default WBC - Westpac

    Couldn't find the old thread, so I started a new one (anyone know of a good way to search for them? The forum search never works for me and couldn't find on Google).

    Noticed that there's a trading halt on WBC, pending an announcement - hope its not a bad one!

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    Quote Originally Posted by Lewylewylewy View Post
    Couldn't find the old thread, so I started a new one (anyone know of a good way to search for them? The forum search never works for me and couldn't find on Google).

    Noticed that there's a trading halt on WBC, pending an announcement - hope its not a bad one!


    https://www.nzx.com/files/attachments/234568.pdf

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    Well the market liked that result ay, up 2.8% on the ASX as I type ?

    A continuation of dividend, ok a 7% drop in earnings, perhaps less than expected given ANZ at 13% I think it was, but perhaps also in consideration of a forward expectation that the RBA is done with interest rate cuts, perhaps more important for WBC than ANZ given their domestic focus, earnings stabilty from here forward.

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    Yes, well received by the market although a few reservations as to whether maintaining the dividend will prove to be sustainable. But that's for the future!

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    Default A profit picture (FY2016 perspective)

    Quote Originally Posted by macduffy View Post
    A few reservations as to whether maintaining the dividend will prove to be sustainable. But that's for the future!
    Bank results tend to be horribly complex if you drill down into them. Fortunately for potential shareholders, Westpac release a 'statutory result' and a 'cash result'. The 'cash result' is of great interest to shareholders because dividends tend to be paid from cash available. Plus all of those horrible normalizing corrections are done for you! But some investors are interested in a true 'normalized profit' result. To calculate this, there are at least a couple of corrections you need to make to the 'cash result' (or a whole heap more corrections to the statutory result). My take on the 'normalized result' is in the table below. (Note all dollar figures quoted are Australian dollars.)

    Westpac Group (WBC) FY2016 FY2015 FY2014 FY2013 FY2012
    Cash Profit $7,822m $7,820m $7,628m $7,063m $6,564m
    add back after tax Expense effect of buying J O Hambro Capital Management 0.7x$38m
    less Amortization & Impairment of Intangible Assets and Deferred Expenditure $216m $221m $222m $224m $231m
    less after tax Net gain on disposal of Assets 0.7x$1m 0.7x$103m 0.7x$97m 0.7x$67m 0.7x$46m
    equals Normalized Profit $7,605m $7,527m $7,338m $6,792m $6,328m

    The annual reports (under Group Segment Information) contains notes on why those adjustments to produce the 'cash result' were made.

    Adjustment 1

    -----

    An historic merger with St.George and the acquisitions of J O Hambro Capital Management (JOHCM) and Lloyds Australia resulted in the recognition of identifiable intangible assets. These assets include intangibles related to core deposits, customer relationships, management contracts and distribution relationships. These intangible items are amortised over their useful lives, ranging between four and twenty years. The amortisation of intangible assets (excluding capitalised software) is a cash earnings adjustment because it is a non-cash flow item and does not affect cash distributions available to shareholders.

    Costs (spread over several years) associated with the acquisition of Lloyds have been treated as a cash earnings adjustment as they do not impact the earnings expected from the acquired businesses following the integration period.

    -----

    Put in this light, the adjustments to Statutory Profit are logical. However, it is equally true to say that the intangibles related to the finite lives of core deposits, customer relationships, management contracts and distribution relationships are recognised by Westpac management. And all the money paid for those 'eroding intangibles' by Westpac management was 'real cash' not so long ago. Therefore I contend that these 'amortised intangible' figures should be removed from the cash profit to get a normalised profit picture.

    Adjustment 2

    It is undisputed that selling an asset generates real cash. However, once sold an asset cannot be sold again. I therefore contend that asset sales should be removed from the cash result to create a normalised operating result.

    SNOOPY
    Last edited by Snoopy; 21-01-2020 at 09:01 PM.
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    Quote Originally Posted by Snoopy View Post

    Adjustment 2

    It is undisputed that selling an asset generates real cash. However, once sold an asset cannot be sold again. I therefore contend that asset sales should be removed from the cash result to create a normalised operating result.
    While noticing these reported assets sales I encountered a mystery. Some of these assets sales were detailed in the respective annual reports, but not all. For example:

    1/ the $1m gain in FY2016 lines up neatly with the $1m profit on the sale of Westpac's interests in the Soloman Islands and Vanuatu.
    2/ The $46m sale in FY2012 lines up neatly with the $46m profit received for the sale of the company's VISA shares in that year.

    So far so good. But I was unable to discern what assets were sold over FY2015, FY2014 and FY2013 to generate those other asset sale returns. Any help discerning just what assets were sold would be appreciated. It seems incongruous that $267m in profit would appear on the balance sheet over three years without any explanation!

    SNOOPY

    PS

    1/ I see in the FY2015 results announcement (section 2.2.5) that $60m of income from property sales were booked during that year. Detail in the FY2012 report suggests two of these properties were 182 George Street and 33-35 Pitt Street in downtown Sydney.
    2/ In the FY2014 results announcement, section, section 3.5, the Group’s remaining Visa shares were sold in the half 2HY2014 and the profit on sale was broadly in line with First Half 2014 ($41 million).
    Last edited by Snoopy; 19-06-2017 at 08:33 AM.
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    There is probably a distinction being made between assets which form part of the business - the interest in Visa; minority interests in other banks, finance co's etc - and non-trading fixed assets such as surplus or redundant branch properties, motor vehicles, equipment etc. Is it possible to separate these in your analysis, Snoopy?

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    Quote Originally Posted by macduffy View Post
    There is probably a distinction being made between assets which form part of the business - the interest in Visa; minority interests in other banks, finance co's etc - and non-trading fixed assets such as surplus or redundant branch properties, motor vehicles, equipment etc. Is it possible to separate these in your analysis, Snoopy?
    Prior to FY2015, there was a section in the Annual Report called 'Property Plant and Equipment'. This neatly detailed acquisitions and disposals during the year (See Note 13, AR2014) . Westpac owned only around 2% of the property they occupied back then (AR2014, p124).

    In AR2015 basic figures like 'depreciation of property' are listed in the company expenses. But there is none of the detail that was in prior reports. Nothing on acquisitions or disposals. 'Non interest income' has a line which reads 'Net gain on Disposal of Assets'. But there is no breakdown of what these assets were. They could have been interests in companies (like VISA), or surplus premises. The only way I can fill in the gap is if something is mentioned in the commentary section of the annual report, or a presentation to shareholders.

    I don't want to get too hung up on this because relative to the whole Westpac operation, these items are small. However, it is quite on the cards that Westpac might choose to sell something that is not small. And for consistency, I would like to get this process right. Thanks for your suggestions. I will keep my eyes open.

    SNOOPY
    Last edited by Snoopy; 19-06-2017 at 09:13 AM.
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    Indeed mr macduffy, it's a bit like generally trying to predict the bottom for the aussie banks too, a long piece of string, although with aussie GDP forecast by some to be 3% and interest rates going no lower, one has to start to keep one eye on that, who decides, I don't know. I bought a few WBC at $30.90, comfortable with that for now.

    Be interesting to see what analysts revise to over the coming week, an increment up I expect.

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