Westpac cuts dividend and seeks to raise $2.5 billion after cash profits slide 15%.
WBC shares went into a trading halt this morning ahead of an intended $2.5bn capital raise. The raise will be completed through the issuing of ordinary shares and is intended to provide the bank with an increased buffer above APRA’s “unquestionably strong” capital benchmark. The raising is expected to also create flexibility for potential future changes in capital rules and possible litigation or regulatory actions.
With the benchmark expected to be enforced from 1st January onwards, many analysts forecast that WBC’s tier one capital ratio has dropped below the 10.5% benchmark, which means it is the least well capitalised of Australia’s big four banks. As a result, WBC is raising funds to improve its capitalisation. Of the $2.5 billion being raised, $2 billion will be through an institutional share placement with the remaining $500 million to be raised through a share purchase plan (SPP) being offered to retail shareholders.
Included with details of the intended capital raise, WBC also released its annual results which, like ANZ a week earlier, showed that the bank experienced a rough year as a result of increased competition, record low interest rates, reduced margins and the removal of its financial planning division.
Overall Statutory net profit declined by 16% to $6,784m, cash earnings reduced by 15% and return on equity reduced by 2.25% to 10.75% for the year. WBC’s net interest margin rate (NIM) also reduced by 10 basis points to 2.12% as a result of the record low interest rate environment.
Another major result that may have reasonable impact on WBC’s share price was the 15% reduction in the fully franked dividend now sitting at 80 cents per share, which WBC stated was required after it lowered its dividend payout ration to 70-75% of earnings and considering the now larger number shares issued following the intended capital raise.
Chief Executive Brian Hartzer said that “remediation costs and the reset of WBC’s wealth business were impactful and when notable items were excluded, cash earnings were down 4% on FY18, which was mainly due to a reduction in wealth and insurance income.”
While WBC did face a number of major issues, it did successfully increase productivity savings by 33% to $405m. An additional $500m is expected to be achieved in 2020 and $200m will be achieved by the wealth division reset and exit from the financial planning business.
Furthermore, WBC sees the digital-only bank platform as an opportunity to expand and reach a new client base and intends to make a minority investment in Uk-based cloud banking technology provider, 10x Future Technologies, to support this expansion. WBC also voiced an optimistic view of the Australian housing market and expects that the recent recovery in housing prices to extend into 2020, particularly in Sydney and Melbourne.
Rivkin holds Westpac (WBC:ASX) in our ASX Blue Chip Strategy, for further trading advice please click here.
For further information regarding the WBC capital raise you can access the official announcement from ASX website following this link.
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