Westpac Banking Corp’s Dividend Sustainability Under Scrutiny Following Disappointing H1 Results

Westpac Banking Corporation’s H1 FY2025 Results: A Glimpse into Future Challenges

Westpac Banking Corporation (ASX: WBC) faces significant challenges that could affect its profitability through FY27. Investors should be cautious, as findings from several major brokers indicate that ongoing competition, rising funding costs, and the pressure from substantial investments will continue to impact Westpac’s performance. Furthermore, these factors are likely to exert considerable strain on dividend payments in the coming years.

Key Highlights of H1 Results

The following are some critical figures from Westpac’s H1 FY2025 financial results:

• Earnings Per Share (EPS): $1.01, a 3.2% decrease compared to the same period last year, which met broker expectations.
• Net Profit After Tax (NPAT): $3.32 billion, down 1% and missing forecasts of $3.51 billion.
• Net Interest Margin (NIM): 1.8%, an 8 basis point decline that fell short of the 1.92% prediction.
• Common Equity Tier 1 (CET1) Capital Ratio: 12.2%, slightly improving from expectations.
• Dividend Per Share (DPS): $0.76, unchanged from the previous year but below expectations of $0.80.

The bank’s ex-dividend date is set for 8 May, with a trailing 12-month dividend yield of 4.68%, fully franked, based on the stock price of $32.45.

Broker Insights

Following the release of Westpac’s results, several brokers provided their evaluations:

Citi:

• Rating: SELL
• Target Price: $27.75
  Citi highlights that statutory earnings were 3-4% below expectations, primarily due to a decline in NIM. Competition for deposits is expected to intensify, potentially limiting revenue and pressuring dividends. Citi maintains a SELL rating, citing Westpac’s valuation as overstated relative to historical figures.

Macquarie:

• Rating: UNDERPERFORM
• Target Price: $27.50 (down from $28.00)
  Macquarie notes a slight miss in results and anticipates that other broker forecasts for FY26 and FY27 earnings will be revised down. With impending rate cuts and tough competition, the outlook for revenue is forecasted to become more challenging.

UBS:

• Rating: BUY
• Target Price: $36.00 (down from $38.00)
  UBS considers the results largely in line with consensus but acknowledges capital cost concerns. The broker has adjusted NPAT forecasts but remains optimistic about Westpac’s strategic focus on business and institutional banking as a positive factor.

Broker Consensus Overview

To derive a consensus rating, we assign values to broker recommendations and calculate an average. Based on recent assessments, Westpac’s average rating value is -0.50, resulting in a Broker Consensus Rating of SELL, unchanged from previous assessments. The consensus target for Westpac is now $28.95, reflecting a perceived overvaluation of approximately 9% based on the current stock price.

Comparing WBC with Other ASX Banks

When assessing Westpac against its peers within the ASX banking sector, the following broker consensus ratings and targets emerged:

1. ANZ Group (ASX: ANZ)

   • Rating: HOLD
   • Target: $28.49 (5.2% overvalued at $30.06)

2. Bendigo and Adelaide Bank (ASX: BEN)

   • Rating: HOLD
   • Target: $10.38 (9.1% overvalued at $11.42)

3. Bank of Queensland (ASX: BOQ)

   • Rating: SELL
   • Target: $6.35 (14.7% overvalued at $7.44)

4. Commonwealth Bank of Australia (ASX: CBA)

   • Rating: SELL
   • Target: $112.22 (32.8% overvalued at $166.93)
5. National Australia Bank (ASX: NAB)
   • Rating: HOLD
   • Target: $33.81 (5.7% overvalued at $35.85)

Dividend Performance Among Peers

Here’s a comparison of recent dividend yields and ex-dividend dates for key banks:

• ANZ: 5.5%, 70% franked, next ex-dividend in November.
• BEN: 5.5%, fully franked, next in September.
• BOQ: 4.7%, fully franked, next in October.
• CBA: 2.8%, fully franked, next in August.
• NAB: 4.7%, fully franked, next in November.

Conclusion

Westpac faces a challenging road ahead, with various factors likely to impact its profitability and dividend sustainability. Investors should remain vigilant and consider broker insights when evaluating their positions, especially in light of competitive pressures and shifting market dynamics.