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Westpac (ASX:WBC) has released its full-year results for FY23, with profits up 26 per cent but still a touch below expectations.

On a year-on-year (YoY) basis, Westpac’s profits climbed 26 per cent to $7.2 billion.

Its full-year results published this morning factor in September 30 as the end of the year.

Today, the company’s share price jumped almost three per cent just before midday AEDT.

However, year-to-date performance is down more than six per cent. One-year returns are lower, down 9.2 per cent.

The good news

“Over the past year we’ve further strengthened the bank, improved our financial performance and continued to support customers in a rising interest rate environment,” WBC CEO Peter King said.

“A strong banking sector is vital for a resilient economy and Westpac’s balance sheet is the strongest I’ve seen in my 29 years at the bank.

Mr King outlined Westpac’s exit from 10 businesses through the period and a fall in expenses of one per cent.

Margins increased two basis points too, but King says the bank has more work to do.

The bad news

While higher profits and margins can only be a good thing – implied by the stock’s jump this morning – the situation isn’t perfect.

In particular, Westpac is pointing ahead to a suboptimal 2024.

“The second half of 2023 presented a more challenging environment for Westpac and the broader industry,” Mr King wrote.

“This is expected to continue into 2024.”

He also outlined that high interest rates have put pressure on mortgage holders in particular.

Westpac offers savings premium

In Westpac’s benefit, the company reports two-thirds of its savings are in high-interest accounts, implying customers will be incentivised to keep deposits with the bank.

One thing to note: ANZ (ASX:ANZ) bank recently cut its savings account interest rate last month, alongside the smaller Australian Unity and Defence Bank.

Westpac is the only bank with a savings rate of more than five per cent.

How long this can last remains to be seen.

Interest rate implications

The Reserve Bank of Australia (RBA) is set to decide tomorrow whether it raises interest rates by 25bps (or more).

After the last inflation read, analysts are expecting a rate rise in November – on the same day as the Melbourne Cup.

While punters (and professional economists) remain divided, both ANZ and ING Bank have hiked rates in anticipation.

ANZ raised its rate by up to 0.35 percentage points; ING raised its by 0.08 percentage points.

Share buyback softens blow

In a win for the bank’s shareholders, Westpac has called a $1.5 billion share buyback.

Share buybacks, for the uninitiated, are what they sound like – a company purchases back its own capital.

This causes the share price to rise as the total volume of shares on issue undergoes a consolidation.

Critics of buybacks posit the practice allows a company to, in a sense, ‘artificially’ improve its share price.

Westpac’s share price reflected on a 5-day chart. Source: TradingView

Investors not complaining

But shareholders who stand to benefit are rarely on board with critics. For retail investors in particular, the moves are generally received well.

The company has also clocked a 72-cent final dividend per share, reflecting a total dividend of 142 cents, up 14 per cent on FY22.

But perhaps the most promising sign is an improvement in Westpac’s CET1 capital ratio.

What’s a CET1 ratio?

CET1 stands for Common Equity Tier 1, which is effectively the bank’s core capital holdings.

The legal CET1 requirement for banks is a European regulatory invention that is intended to ensure resilience of a financial system.

Theoretically, a bank with a subpar CET1 ratio would be more likely to collapse during a shock event – like a bank run, war, or even widespread natural disaster.

The CET1 ratios in each Australian Big 4 are monitored by the Reserve Bank.

What’s the baseline?

Each of the Australian majors is required to keep a CET1 ratio of at least 10 per cent.

Westpac is hovering above that at 12.4 per cent as of September 30 2023.

Last year, that ratio sat at 11.3 per cent – meaning Westpac has put more room between it and the threshold.

For comparison, Macquarie Group (ASX:MQG) reported its results last week, posting a CETI ratio of 13.2 per cent – though, its YoY earnings went backwards.

Banking sector pressure

Despite strong results from Westpac today, the Australian banking sector continues to keep analysts risk off.

Net interest margins (NIMs) remain suppressed sector-wide and increased competition between each of the banks has been a stress factor for performance.

All in all, ANZ remains stockbrokers’ favourite major Australian bank.

ANZ Bank also currently posts the best six-month performance results of five per cent out of all Aussie banks, according to Morgan Stanley analysts.

Consider the following broker recommendations for each of the majors.

  • Westpac (WBC) – three brokers rate buy; six brokers rate hold; 10 brokers rate sell.
  • Commonwealth Bank (CBA) – zero brokers rate buy; five brokers rate hold; 15 brokers rate sell.
  • National Australia Bank (NAB) – nine brokers rate buy; five brokers rate hold; four brokers rate sell.
  • ANZ Bank (ANZ) – 12 brokers rate buy; four brokers rate hold; two brokers rate sell.

Westpac shares last traded at $22.09.

WBC by the numbers
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