Stock of the day: Westpac

(AI video summary)

This video was created on 5 May for IG audiences by ausbiz.

ASX code: WBC

Westpac results miss expectations despite digital push

Westpac Banking Corporation has posted results slightly below expectations, with net profit down 1% despite ongoing digital transformation initiatives worth $3 billion.

Westpac's financial results showed net interest margins down 3 basis points (bp) year-on-year (YoY) but flat quarter-on-quarter (QoQ). Total loans increased 3%, while customer deposits grew 7% to $697 billion. Operating expenses rose 6% due to technology investments, while credit impairments fell. Chief executive officer (CEO) Andrew Miller suggested the bank may have passed the cyclical low point.

Market influences and valuation concerns

Market analysts note the banking sector's performance appears driven by liquidity rather than fundamental strength. The Australia 200 is heavily influenced by a few stocks - Commonwealth Bank of Australia (CBA) and BHP represent over 20% of the index.

Despite underwhelming results, Westpac trades near pre-Covid-19 pandemic levels at 10-year highs. This comes amid challenging economic conditions and the Reserve Bank of Australia (RBA) signalling further interest rate cuts, which could pressure bank margins.

Digital transformation and competitive position

Westpac's $3 billion digital investment aims to modernise operations as physical branches continue closing, particularly in Central Business District (CBD) locations. Among major Australian banks, CBA leads the market, while Macquarie Group offers better growth prospects.

Westpac's Common Equity Tier 1 (CET1) capital ratio fell 31 bp but remains well above the 10.5% regulatory minimum.

Investment considerations

The consensus for Westpac shares is 'hold' rather than 'buy' at current levels. Many existing shareholders purchased at lower prices and have significant capital gains, reducing the incentive to sell. Government guarantees for deposit holders provide a safety net, limiting catastrophic downside risk while upside potential appears limited from current valuations.