Westpac Banking Corporation: the Covid-19 impact examined

We look at the earnings and dividend implications of Westpac’s latest market announcement.

In a release titled items affecting Westpac's First Half 2020 results, the residentially inclined bank today announced a sweeping set of provisions and asset write-downs totalling some $1,430 million.

In response to today’s release – Westpac’s Chief Executive Officer, Peter King – reassured investors that the bank was in a strong position, saying:

‘Having spent much of the last decade strengthening our capital we are well placed to respond to the unfolding environment.'

On a granular level and on an after tax basis: $1,030 million of the $1,430 million in write-downs and provisions has been attributed to costs related to the current AUSTRAC proceedings against Westpac, with the bank making a $900 million provision for any potential penalty it may incur from the regulator; with a further $260 million related to customer-focused provisions, also set aside.

Rounding out the total, the bank said it is set to reduce the value of various assets totalling $70 million; and book another $70 million in costs associated with 'changes in the provision of group life insurance.'

Yet maybe most topically, it was noted that the first-half ‘impairment charge is expected to include a significant collective provision increase that will lift the Group's total provision balance in anticipation of credit losses that it expects to incur from the COVID-19 outbreak.’

Analysts have long been expecting such a move from the banks. In late March, for example, Citibank analysts said:

‘We expect credit provision will rise sharply, but overall credit losses will be lower than what the banks experienced in the GFC.’

Westpac share price: the earnings impact

All up, as a result of these write-downs and provisions, WBC’s first-half cash earnings as well as net profits are set to come in lower than previously expected. Importantly, the impact of these lowered earnings would be factored into any announcement concerning the bank’s potential interim dividend.

'A decision on 1H20 dividends will be made by the Board as part of finalising the Group's accounts and is expected to be announced with Westpac's 1H20 results,' due out 4 May.

The market responded intriguingly to today’s news: Though the Westpac (WBC) share price fell at the open, at one point, off its intraday low, it was up as much as 2.69%.

Westpac finished out the session at $16.27 per share.

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