WBC - Westpac

[Snoopy]

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!

I found the old thread Lewy. Just do an 'Advanced' forum search and look for threads with WBC in the title. I think that is the easiest way. However the old thread was titled 'Westpac Banking Corporation'. In fact the only entity you can buy shares in is 'Westpac Group'. I think the dropping of that middle word 'banking' is quite important. So I have decided to build on your thread instead of the old one.

SNOOPY

[Snoopy]

So I have decided to build on your thread instead of the old one.

I aim to assess whether the 'Westpac Group' is a suitable candidate to which to apply the (Mary) 'Buffett' growth model .

WBC, incorporated in Australia, but also listed on the NZX describes their operation of their business in the FY2015 Annual Report as follows:

"to be one of the world's great service companies helping our customers, communities and people to prosper and grow"

It would be an oversimlification to think of Westpac just as a traditional bank. They have a strong wealth and insurance business through associated company BT Group, in which they sold down their controlling stake in FY2015. The business is based around strong Australian and New Zealand geographic foundations. The New Zealand business is a self contained unit.

The business objectives are to support:

1/ Australian and New Zealand consumers.
2/ Australian and New Zealand businesses, both large and small
2/ Regional Trade and Capital Flows for business customers via the WIB ("Westpac Institutional Banking Division".)
3/ A 'digital ready infrastructure' for the future.

Major Competitors in this sector are listed in order by $A revenue (interest income).

1/ Commonwealth Bank of Australia: $33,817m
2/ Westpac Bank: $31,822m
3/ ANZ Bank: $29.951m
4/ National Australia Bank $27,629m

Conclusion: As number two in the market, WBC passes the first Buffett Point test.

SNOOPY

[Yoda]

Is this the same Westpac that sold 30 mil shares in ATM on 31/5/17?
They must be gutted today. Maybe it's more complicated than that.......

[Snoopy]

Is this the same Westpac that sold 30 mil shares in ATM on 31/5/17? They must be gutted today. Maybe it's more complicated than that.......

Westpac run a wealth management business where they manage fund based share portfolios on behalf of clients. Despite only holding a minority stake in what used to be a fully owned wealth management subsidiary, BT, BT is still classed as a 'related corporate body' to Westpac (apparently!). Thus if BT make changes to their clients portfolios, then Westpac must report this to the NZX. All these funds will be in trust for clients. So I expect that selling 30m ATM shares will make not one jot of difference to shareholders in 'Westpac Group'. It was probably a smart move on BT's part though. I don't think that the A2 company will be able to get hold of enough 'A2 milk raw product' to drive the volumes of sales and future profits that an A2 share price nearing $4 implies.

SNOOPY

[Snoopy]

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

[Snoopy]

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).

[macduffy]

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?

[Snoopy]

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

[Snoopy]

WBC passes the first Buffett Point test.

Westpac Group (WBC)	FY2016	FY2015	FY2014	FY2013	FY2012
Normalized Profit {A}	$7,605m	$7,527m	$7,338m	$6,792m	$6,328m
Shares on Issue EOFY {B}	3,313m	3,140m	3,114m	3,087m	3,043m
Earnings Per Share {A}/{B}	$2.30	$2.40	$2.36	$2.20	$2.08

A lower year on year result in FY2016 is not enough to obscure a longer term trend.

Conclusion: Pass Test

SNOOPY

[Yoda]

Westpac run a wealth management business where they manage fund based share portfolios on behalf of clients. Despite only holding a minority stake in what used to be a fully owned wealth management subsidiary, BT, BT is still classed as a 'related corporate body' to Westpac (apparently!). Thus if BT make changes to their clients portfolios, then Westpac must report this to the NZX. All these funds will be in trust for clients. So I expect that selling 30m ATM shares will make not one jot of difference to shareholders in 'Westpac Group'. It was probably a smart move on BT's part though. I don't think that the A2 company will be able to get hold of enough 'A2 milk raw product' to drive the volumes of sales and future profits that an A2 share price nearing $4 implies.

SNOOPY

Thanks Snoopy, very helpful. I imagine there could be quite a drop in SP if they miss their future targets.