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Westpac ‘undervalued’, says Morningstar

Westpac ‘undervalued’, says Morningstar

James Mitchell
— 1 minute read

The research house believes Westpac shares are currently trading 16 per cent below valuation following the release of a disappointing first-half financial result.

On Monday, Westpac revealed that its profit sank by 19 per cent for 1H19, with the group taking a blow from its wealth division’s remediation costs of $484 million and restructuring expenses of $136 million.

“Despite the disappointing announcement, Westpac remains our preferred major bank,” Morningstar analyst David Ellis said. 

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“The withdrawal from the provision of financial advice, announced 19 March 2019, effective 30 June for salaried advisers and 30 September for authorised representatives, will over time remove most compliance and operating risk from Westpac’s remaining wealth businesses. 

“Longer term, we are confident Westpac can deliver modest earnings growth, based on sustainable lending growth, steady net interest margins and superior operational efficiency. Sustainable dividends and attractive returns on equity will follow solid earnings,” he said. 

However, Morningstar has reduced its fiscal 2019 forecast from $7.8 billion to $7.5 billion as the result of Westpac’s additional $357 million provision charge. 

“Based on our unchanged $33 fair value estimate, the stock is undervalued, trading 16 per cent below our valuation,” Mr Ellis said. 

Westpac shares were trading at just over $27 when the market closed on Tuesday. 

The group has provisioned $1.4 billion in total, pre-tax, for its customer remediation costs for the past three years, including $1.2 billion for customer refunds.

Westpac has more than 400 employees working on remediation. Around $200 million has been repaid to customers in the last 18 months.

CEO Brian Hartzer said the half-year result was “disappointing” and reflects weaker business conditions and the bank dealing decisively with outstanding issues, including remediation and resetting its wealth strategy.

“We’re exiting personal financial advice to focus on the parts of our wealth business where we have a competitive advantage, and we are delivering significant cost savings by simplifying our business,” he said.

The funds management business, excluding advice, posted $236 million in earnings, dropping by 16 per cent from the year before. Insurance had earnings of $87 million, marking a 35 per cent decrease.

 

Westpac ‘undervalued’, says Morningstar
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