Westpac to announce cost-cutting campaign driving share price rise

Westpac’s first-half results, to be announced on Monday, May 3, will be the most closely watched release of all the big four banks as the chief executive Peter King will reveal plans to cut the lender’s operating costs. 

King flagged a reset of Westpac’s cost base last November when the bank announced a full-year cash profit for 2020 of $2.2 billion. The bank’s profit was hurt last year by a $1.3 billion penalty from breaching anti-money laundering laws, but analysts expect to see a significant recovery in its interim earnings. 

Morgan Stanley analyst, Richard Wiles believes the plan to cut costs will a key driver of share price performance over the next few months. 

Westpac’s share price has performed better than any of the other big four banks. Since the beginning of January, its value has appreciated by 29.3 percent reflecting investors' views on the turnaround story. This compares to the ANZ which is up 25.2 percent, National Australia Bank which is 16.6 percent, and the Commonwealth Bank whose share rose 5.8 percent. 

“The Cost Re-set' plan is an important catalyst because Westpac’s cost performance has been disappointing in recent years and we believe a credible medium-term cost reduction strategy is an important driver of the recovery in earnings, return on equity (ROE) and dividends,” said Wiles. 

Three scenarios 

The analyst offered three different scenarios for this event that will unfold on May 3. The first scenario, and the one that Wiles wants to see, is that Westpac reaches its target cost base of $8.5 billion for its core businesses. “This should come with a 3-year road map, details of anticipated cost savings, and key metrics to monitor progress,” he said.   

Wiles estimates this would increase consensus earnings forecasts by 5 percent for 2023 earnings and see an ROE of 10 percent for that year. 

“The trading multiple discount to peers would narrow and we estimate the share price of between $27.20 - $27.70 based on a price-earnings multiple of 13.3 and a dividend yield of less than 5 percent.  

A second scenario has Westpac announcing a 3-year target cost base of less than $9 billion. “This would still see expenses of the continuing business above the 2019 level. Morgan Stanley expects a share price of between $24.75 to $25.25 based on a PE of 12.8 and a yield of around 5.25 percent.  

Under the final scenario, Westpac would announce the cost reset plan but guide to core expenses at between $9.3 billion and $9.5 billion. 

“This would disappoint investors and would likely drive a 5 percent downgrade {to forecasts} and a de-rating. In this event, the bank’s shares would likely trade at between $22.20 and $22.70 based on a PE of 11.5 and a yield of less than 5.5 percent,” he added. 

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