WBC - Westpac Banking Corporation

sptrawler said:

Imagine AUSTRAC trying to police 4000 banks, instead of 4, just underlines what we have been saying IMO.

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Bottom line is that Westpac isn't going out of business.

Yes the share price has slumped but this isn't some speculative mining company or tech hopeful that may well end up worthless. Westpac isn't going anywhere despite the current drama.

Government can't afford them to fail, same with the 3 other big banks, so no chance they'll bring that about.

That said, government does have them over a barrel basically and to the extent that any policy of Westpac's differs from government policy, I expect Westpac will be changing theirs quickly but quietly to match the government's. That sort of thing will be the unspoken way out of the mess is my thinking.

Smurf1976 said:

Bottom line is that Westpac isn't going out of business. By

Yes the share price has slumped but this isn't some speculative mining company or tech hopeful that may well end up worthless. Westpac isn't going anywhere despite the current drama.

Government can't afford them to fail, same with the 3 other big banks, so no chance they'll bring that about.

That said, government does have them over a barrel basically and to the extent that any policy of Westpac's differs from government policy, I expect Westpac will be changing theirs quickly but quietly to match the government's. That sort of thing will be the unspoken way out of the mess is my thinking.

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Absolutely, also the Government needs to get this all bedded down, so the banks can get back to implementing the Government's fiscal policy, be that lending, or following the RBAs lead.
It isn't doing the economy any good having an ongoing running commentary on the workings of ASIC, APRA and AUSTRAC.
Once everyone accepts the whipping has been handed out and the banking institutions have been put in their place, it will be back to making money, to become too strong to fail again.
To me this screams a buying opportunity. Just my opinion.

sptrawler said:

Absolutely, also the Government needs to get this all bedded down, so the banks can get back to implementing the Government's fiscal policy, be that lending, or following the RBAs lead.

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Emphasis mine.

One thing I think is that we'll see the big banks more inclined to toe the line regarding government policy going forward.

It would be a brave move from any of the big 4 to foreclose on farmers hit by drought at this point for example.

sptrawler said:

Once everyone accepts the whipping has been handed out and the banking institutions have been put in their place, it will be back to making money, to become too strong to fail again.
To me this screams a buying opportunity. Just my opinion.

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Agreed. Bought a parcel yesterday at $24.41.

I think you may be too early.
Look what happened to the Commonwealth Bank and that wasn't as bad. It dropped for weeks before it stabilised, and this is nasty with terrorists, paedophiles, mafia, you name the crime.

Knobby22 said:

I think you may be too early.
Look what happened to the Commonwealth Bank and that wasn't as bad. It dropped for weeks before it stabilised, and this is nasty with terrorists, paedophiles, mafia, you name the crime.

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Anything is possible. If so, I'll buy more. Don't forget we are down almost 17% from the September 24th high. Time will tell.

Smurf1976 said:

One thing I think is that we'll see the big banks more inclined to toe the line regarding government policy going forward.

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Wasn't it more that bank culture - "the pursuit of profit " - was paramount, while their compliance structures were deficient.
I'm not saying that they were always acting lawfully, just that I suspect they did know the law but had poor systems in place to ensure it was met. It's pretty hard to miss tens of millions of unlawful transactions unless you have relied on (flawed) "compliance systems."

Smurf1976 said:

It would be a brave move from any of the big 4 to foreclose on farmers hit by drought at this point for example.

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It would also be not clever until rains have broken the drought. However, I think foreclosures have been an ongoing theme so adding one or more to the mix might not get too much attention.
I hope I am wrong!

rederob said:

It would also be not clever until rains have broken the drought. However, I think foreclosures have been an ongoing theme so adding one or more to the mix might not get too much attention.
I hope I am wrong!

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I could well be wrong in this thinking but I'm viewing it as similar to anyone who finds themselves in trouble with the law and is hoping for some sort of leniency.

If you've done the wrong thing and have been caught doing it then it's wise to immediately stop doing anything else which, whilst not technically illegal in itself, the Police Officer, magistrate, government inspector, your boss or whoever you're dealing with would strongly prefer you didn't do. Be nice and keep them as happy as you can if you're hoping for leniency.

So I'm thinking that in Westpac's case then now wouldn't be a good time to give the government a reason to be on the attack over anything else. So don't be failing to pass on any RBA rate cuts in full, don't be evicting any farmers right now and so on. Just accept some costs financially until everything calms down.

I could of course be completely wrong and they're not thinking that way at all.

Smurf1976 said:

Emphasis mine.

One thing I think is that we'll see the big banks more inclined to toe the line regarding government policy going forward.

It would be a brave move from any of the big 4 to foreclose on farmers hit by drought at this point for example.

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I would guess the banks will be reluctant to foreclose, but equally reluctant to give " easy" loans, that is where the credit squeeze will manifest IMO.
Only those with good collateral will get loans.
Just my opinion.

Cam019 said:

Agreed. Bought a parcel yesterday at $24.41.

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I would like to know more on your strategy to purchase at this time.
So many legal cases and the CEO has been sacked with $2.1 M handshake for 12 months salary. He should have been forefeited all his past shares than stopping future ones. Lots of window dressng.
Notwithstanding has the market factored the losses already ? The price slightly rose up.
https://smallcaps.com.au/westpac-sued-23-million-breaches-anti-money-laundering-laws/

I actually lowered my lowball buy by an extra 2 $
$22 a share and i speculatively buy for a quick sell on rebound

Miner said:

I would like to know more on your strategy to purchase at

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Just at work @Miner, I'll come back to you when I can.

qldfrog said:

I actually lowered my lowball buy by an extra 2 $
$22 a share and i speculatively buy for a quick sell on rebound

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Looks like your rational thoughts on wbc could prevail.
Lehman collapsed. Australian Government will try but dont have the capability to support it on taxpayers money if the inquiries slammed a heavy fine or more serious actions. I understand capital fund has invested on wbc as well.
What is needed to get few directors sent to jail as happen in USA.

Miner said:

Australian Government will try but dont have the capability to support it on taxpayers money if the inquiries slammed a heavy fine or more serious actions.

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I might be missing something here but would any fine paid by Westpac not be paid to the Australian government?

For every $ Westpac loses in fines, government has another $ which increases their ability to, among other things, prop up a bank.

Or am I missing something about who the fine would be paid to?

Smurf1976 said:

I might be missing something here but would any fine paid by Westpac not be paid to the Australian government?

For every $ Westpac loses in fines, government has another $ which increases their ability to, among other things, prop up a bank.

Or am I missing something about who the fine would be paid to?

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the fine is nothing, the share price hit major: the fine has to be paid from cash and can not be leveraged, so the share price drop will be big.and as a bank after BASEL 2? or are we at 3? they might need more capital again.
in any case why gambling on this and the RE market?, gov might prop the RE market but they do not give a damn about shareholders and worst case scenario we can live with 3 big banks or even 2

WBC is basically flat for the year, has the share price fall really been that dramatic?

Miner said:

I would like to know more on your strategy to purchase at this time.
So many legal cases and the CEO has been sacked with $2.1 M handshake for 12 months salary. He should have been forefeited all his past shares than stopping future ones. Lots of window dressng.
Notwithstanding has the market factored the losses already ? The price slightly rose up.
https://smallcaps.com.au/westpac-sued-23-million-breaches-anti-money-laundering-laws/

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Okay... why do I like WBC at $24.41? Firstly, big 4 bank - I think it is too big to fail. As I said somewhere before, the share price is down around 17% from it's September high. I also believe that the market has already priced in most, if not all, of the negative news over the last week or so. The market is expecting terrible news... so if it comes, it's already expected. If it's not as bad as what is expected, we could see some upside movement. Anyway, enough of my opinion... let's get to the numbers.

Share price - $24.41
EPS (ttm) - $1.89

This gives us an earnings yield of 7.74%. Dividend has been cut to 80c. So if we assume $1.60 dividend for the 2020 year, this still gives us a 6.55% dividend yield, grossed up is 9.36%. It could be cut more again, but this gives us something to work with. Dividend payout ratio works out to be 84.66%. Book value per share for the most recent quarter was $18.79 which means you can buy Australias second largest bank at 1.3x book value (this was only done quickly, but it gives a ballpark to work with).

I have done an IV calculation and putting all the negative sentiment aside, this bank it trading at a large discount to what I perceive to be its intrinsic value. That is even using very low book value growth rates over the next decade, and further reduction in EPS than listed above, just to be conservative. Don't forget, the risk free rate (10Y government bond yield) is at measly 1.028%. There is a risk premium on offer here of 6.71%. If the 10Y yield stays below 2-3% for the next decade, or two, or three... current prices in equities are looking very cheap.

Cam019 said:

Okay... why do I like WBC at $24.41? Firstly, big 4 bank - I think it is too big to fail.

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too big to fail doesn't necessarily equate to something being a good investment. sure there's virtually zero chance of it collapsing, but if it ends up fetching you a total return (dividend + capital gain/loss) of 3-5% over the span of a few years, that's probably not a good investment, there's better ways to utilise your capital than that.

Cam019 said:

EPS (ttm) - $1.89

This gives us an earnings yield of 7.74%. Dividend has been cut to 80c. So if we assume $1.60 dividend for the 2020 year, this still gives us a 6.55% dividend yield, grossed up is 9.36%. It could be cut more again, but this gives us something to work with. Dividend payout ratio works out to be 84.66%.

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85% is a very high payout ratio. historically big bank payout ratios have tended to sit in the 70-75% range, and a lot of that history was before the royal commission and stricter capital adequacy ratios, Basel III etc. personal opinion only, but i don't think a payout ratio of 85% is sustainable, especially following those two things. it's got to get back to the 70-75% range, and we're already seeing them start to cut the div to possibly ease their way back there (they won't want to do it in one big jump as that might spook investors). otherwise we'll be seeing a lot more capital raisings and eventually investors will get sick of them. those insto investors especially must be a bit gun shy now, they bought in at the $25.32 bookbuild price, which was at the time a significant discount to the theoretical ex-rights ex-div price, only to find themselves almost instantly in the red when this scandal broke days later.

there also has to be a high degree of uncertainty around those EPS forecasts. i'd speculate that this has come about because they (along with all the other banks) have been systematically stripping resources from non-revenue generating departments like compliance over the past decade or more. this could force them into increasing expenditure to refurbish those departments (hiring more personnel, building newer systems etc.) so that they can sufficiently monitor these sorts of things, as well as deal with increased regulatory oversight, all of which would negatively impact EPS. hard to say how much though.

that being said, if i didn't already hold several thousand units in my core portfolio which i've had for a number of years now, i might've been tempted at around 23.50, last major low about a year ago at the height of the royal commission, so maybe some support to be found there. but there's no way i'd want to increase exposure now, with all the uncertainty and headwinds swirling around.

Sharkman said:

too big to fail doesn't necessarily equate to something being a good investment.

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Exactly what people told me in 1992 when all banks were in a real pickle thanks to the likes of Tricontinental, Bank SA and a few others and I bought Westpac at 95 cents. Is it the same now when it settles around a bottom?
No idea as unlike in those days, I don't have first hand experience of the industry.
However, it might be a worthwhile punt for the very long term - mine certainly was.