Is Westpac top heavy?
15 July 2014
Self managed super investors have a great liking for banks because of the dividend yield. JP Morgan has an overweight recommendation on the stock. It has very much tracked the market:
Morgan reckons there are operating issues within Westpac and St George, affecting revenues, expenses and capiotal intensity. Two other banks seem to be doing better:
"A weaker revenue contribution and lack of cost leverage sees both ANZ and CBA deliver one third higher profit per branch than Westpac, while St George’s higher capital intensity dilutes its ROTE. In our view, a potential mis-alignment between brand strategy and distribution footprint suggests WBC initially needs to 1) reduce St George presence back to NSW only (closure of ~50 branches), 2) exit locations where there is no alignment between brand and customer attributes (closure of a further ~150 branches), 3) reconsider the burden that central costs are putting on the branch network, and 4) increase sales and deposit gathering to improve branch profitability metrics relative to peers. We believe WBC should re-visit the merits of a multi-brand strategy as product simplicity and digital innovations evolve."
The stock's dividend yield is forecast by Morgan to fall from 5.7% to 5.4%, although of course this is simply an estimate. Morgan casts doubt on the branch metrics:
"Westpac branch metrics are not flattering. We find the largest shortfall to peers is on Net Interest Income, which is quite surprising, given that one of the touted benefits of ‘multi-brand’ flexibility is to provide more scope to manage margins. Further, despite having a 60% larger branch network, WBC’s costs on a per branch basis are consistent with those of ANZ, indicating to us a lack of scale benefit. Overall, the weaker revenue contribution and lack of cost leverage sees both ANZ and CBA deliver one third higher profit per branch."
The Big Four banks love size and scale to maintain their dominance, but Morgan suggests that St George appears too capital intensive. St George’s branch network is half of the Westpac brand, 60% of the loan book 60% but 72% of the capital:
"There is opportunity. With the potential mis-alignment of brand strategy and distribution footprint, we believe that both the Westpac and St George brands are over-represented in areas that are not consistent with their respective core customers. We estimate that 50 St George sites outside NSW and a further 150 sites across all brands should be considered for exit, taking closures to 200 out of a possible 291 overlapping sites (23% of WBC’s network). This could reduce annual costs by ~A$400m, while keeping the ‘multi-brand’ strategy alive."
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