WBC - Westpac Banking Corporation

[Cam019]

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.

Still holding from 95 cents @Country Lad?

 

[kahuna1]

85% is a very high payout ratio.

You may have heard there was a royal commission and remediation costs ... ONE off costs lowered NPAT.

WBC paid out 1.88 in dividends for many years, its now $1.60 ...
It just raised capital to fix the balance sheet.

Whilst AUSTRAC thing may cause another year of costs, LOWER one off costs as the remediation costs were massive, at worst ... maybe $1.50 dividend so 6% yield at $25 fully franked verses likely cash rate of 0.5%.

Obviously we are lower, and I add and will add as and if it goes lower.

What the current payout ratio is ... this year ... is irrelevant given the outcome and costs involved with the royal commission.

Just checked and payouts alone are 958 million and overall cost about 1.5 billion so that effected ratios in the extreme in 2019. I would stress yet again the dividend is NOW $1.60 NOT $1.88 and yes the fine is unknown at this stage, its possible Westpac having informed AUSTRAC many months ago about some of the issues is legally on very strong ground to get a LOWER fine than CBA not higher.

I suspect that is of course unlikely, and whilst not so happy, its unlikely other than a blip ... all be it a a billion dollar blip for now.

Either way, dividend at $1.60 or $1.50 longer term its yielding a lot more than the other big 3 banks.

As such, either the shed 10% in price or WBC is about 5% too cheap even with the fleas it has.

Only time will tell and with the USA market at all time highs, ignoring any and all bad news slowly slowly ... adding for me. The delusional rally of the USA based more upon a threat of even more tax cuts for the rich and ignoring a 1.05 trillion deficit and 23 trillion in debt ... which to be blunt scares me.

We have our banking sector near CPI adjusted lows of the post GFC era yet the majority of world stocks are at all time highs.

 

[Sharkman]

You may have heard there was a royal commission and remediation costs ... ONE off costs lowered NPAT.

fair points. there's just one problem - having worked in the financial industry for the past 15 or so years and seen first hand the effects that the introduction of Dodd-Frank, MIFID II, and lately SFTR can have on a financial institution's day to day operations, i can just about guarantee that the consequences of something like this will not be a one off cost. the impact will be ongoing. yes this isn't a Dodd-Frank, but it's the same sort of theme - greater regulatory scrutiny. consider the following:

* reputational damage. it takes years to build up positive reputation, and days to tear it all down. look at what happened with Wells Fargo a couple of years back, and that was "just" fraud - not facilitating crime/money laundering. hard to quantify as it's mostly intangible, but it is there and could be significant

* additional audit/compliance/risk management personnel required to continuously monitor and provide a higher level of detail in reporting to regulatory authorities

* slower on-boarding (and again more personnel required) of new clients/business due to stricter KYC (know your customer) procedures, which i suspect they may have been cutting corners with in the pursuit of profits

* more time and effort spent by front office (ie. revenue generating divisions like sales desks) in learning and navigating the stricter and more complex regulatory requirements imposed on them, means they have less time for actually generating new business/revenue

* additional technology personnel required to not just remediate, but also maintain more robust reporting systems

* given the extra scrutiny on an institution following an incident like this, that means experienced audit and technical personnel familiar with the institution's existing processes and systems are required to ensure that it gets done right, and that it continues to be done right going forward. which takes away time that those personnel could have otherwise spent on projects that could improve profitability (eg. automation/optimising business processes, on-boarding new business)

* this is just speculation on my part - i've worked at a few financial institutions though Westpac isn't one of them - but again, my guess is that this whole thing came about because of chronic under-investment in divisions like compliance, because they don't directly generate revenue. i'll give you a personal example. in my 20s i worked at one of the other big 4 banks. when i first started there, i asked one of the more experienced guys, who i knew thru conversation to also be a stock investor, how do i go about getting a staff trade approved. he said he didn't know. i said, but don't we need to get compliance to pre-approve staff trades before we place them? his reply: "well yeah, but nobody ever polices that, don't worry about it. go nuts mate - just trade whatever you want!". now that the spotlight is on them, if that was the case, they won't be able to get away with rampant cost cutting on those divisions any more, which means additional on going costs

* Basel III is most definitely not a one off - it's been getting phased in over the last few years and is here to stay for the foreseeable future. Basel III is almost certainly going to restrict an institution's ability to pay dividends. given the banks were maintaining a 70-75% payout ratio before the advent of Basel III, i can't imagine they'd be able to sustain a higher payout ratio going forward, with final phases of Basel III about to be introduced in the next couple of years or so

you don't have to believe me. different points of view are what makes a healthy market after all. and there are obviously a lot of unknowns here, neither you, or i, or anyone else knows for sure what the outcome/penalty will be.

but i know what i've seen inside the industry over the years, and more often than not regulatory impositions are going to be a significant drag on a financial institution's performance for years to come. i just wish that this was done as a renounceable rights issue. i would've gladly sold you my rights at a fair price!

 

[Country Lad]

Still holding from 95 cents @Country Lad?

Yes, cetainly am. The dividends are part of the retirement income which allows me to do things like currently sitting on the balcony of the Sea Princes in Akaroa looking at the surrounding hills in sunshine and mid 20's drinking a nice red wine. That is why I said for the very long term in the post.
Mind you I often have to resist the temptation to sell a few everh time the price drops simply because of the profit.

 

[Value Hunter]

Kahuna to me big banks are like Kodak was just before digital cameras came out or Nokia before the iphone, incompetent, bloated and too slow, fat and lazy to adjust to the times. Banks legacy back end systems are atrocious and will probably need tens of billions worth of investment to come into the modern era. This is to say nothing of the atrocious customer service of banks.

For example it often takes 1 month plus to get a mortgage finalized. In the digital age I just cannot see that being sustainable for very long and they simply won't invest enough too keep up consider their very high dividend payout ratios.... Everybody dreads dealing with banks, I know I certainly do. Everything is slow, cumbersome, antiquated and you get buried in paperwork. How long can this situation last? Banks take their customers and their market share for granted. I do not think they will adapt.

People certainly need banking and financial services but they do not need to get it from banks!

 

[Knobby22]

With Austrac, CBA has been fined, NAB will be fined (it is known they are in trouble but not how much), Westpac is in big trouble (They have always been the dodgiest) and ANZ recently got a thanks from the AFP for helping catch criminals and Austrac say they are compliant.

So if I was interested in buying a bank I would choose ANZ, then CBA.

 

[kahuna1]

Teee hee ...

Just shaved off both eyebrows reading the above.

Its funny when one looks at the portfolio of the Australian fund that is in the top 100 of 10,000 funds globally in equities the past 10 years. Whilst not as bullish as he is on the industry his holdings and long term holdings of banks and finance companies and Visa and MasterCard is around 60% of the portfolio.

I suspect he may have some idea of what he is doing.

Can I convince him to shave off both his eyebrows ? Because its all going to disappear overnight ?

If years in banking counted, I started in late 1982 so that's 37 years. Sadly, despite some very senior positions eventually, it does not. Infallibility is not something I am suggesting via experience.

Suggesting Westpac is the dirtiest bank is sadly delusional. Every bank no matter how hard they may try eventually will transact money from despicable sources. That Westpac clearly informed AUSTRAC many months prior to them being handed a statement claim, a Legal one over tiny transactions in the $3,000 range is and will be amusing to watch if Westpac decides to defend.

This aside, I am assuming they will pay around 1 billion fine rather than contest the case.

Perspective seems lost on most when a bank makes in 2019 around 6.8 billion profits and that is even with about half of the remediation costs paid in 20919 in it.

Is a 1 billion dollar fine on 7 billion net profits a big deal ? Yes and NO .

Short term yes, long term no.

Westpac just raised 2.5 billion and prior to that it already was at 10.7% Tier one capital adequacy.

I note some comments on Basel and capital Adequacy and APRA and Australia has the most stringent of all requirements barr any county. If I said I disagreed with virtually all that was said its an aside.

I have made my case, as to why and adding if we head lower ... and for what reason.

I am being paid for the risk, I would add I was clearly exiting a few months ago at 20% higher .... I was adding ... late 2018 at similar and lower levels.

Each to their own.

Good luck with those Uber or We Work bank things. I do prefer a regulated and safe place for my money but some do not.

Enjoy

 

[Knobby22]

Westpac were warned, they still failed to comply and belatedly admitted it. They saved money by running their own system and didn't put enough resources behind it to make it work. They have now closed it down.

ANZ has dropped a lot also I note. Since they have been cleared by Austrac maybe that would be a better buy? ANZ spent a lot of money and resources ensuring they complied. It also helped that they operate more internationally.

The danger for the banks long term isn't little mini banks , it's companies like Amazon, Google and Apple. Already Apple has their fingers in their pie. Also this present oligarchy is ripe for international competition.

 

[Toyota Lexcen]

What a farce it has has become for banks.

It's not about being a bank, all about doing the government's job on crime, terrorism, financial stability etc

 

[Smurf1976]

It's not about being a bank, all about doing the government's job

Banking is one of those quasi-government industries really. No matter whether it's privately owned or run by government it's never going to be too far removed from government intervention.

Others in that category include all forms of commercially supplied energy, water, hospitals, mainstream media and any dominant transport operator (toll roads, rail either the track or the trains, aviation especially Qantas).

I don't outright avoid such companies but I'm always aware that to some extent they're effectively privately owned listed arms of government at risk of politics. I'm not saying it's wrong or right just that it is.

 

[kahuna1]

Ex Div and its squished. I agree with no growth ... its paid it out via dividends too high for a long time. As well as that increased capital needed to avoid any GFC event so more put as reserves.

Here, well ... I am still of the opinion that maybe we don't cut rates. Not until needed. So at $1.66 Div a $24- share price is 6.9% and for me, its a good deal. Franking either way not an issue and tax free 6.9% verses 1.5% or maybe 2% with tax is not even a question. Sure we may head lower and with a lot going on via the USA with a lot of issues from China and trade to Iran and other war efforts, added to this Trump being chased for 20 odd reasons .... maybe we do get it lower.

Happy either way. At $22- and not thinking the dividend is under any threat unless the world ends ... at $22- its 7.55% and NAB is the least exposed to the housing side as well.

Conversely, if it were to rise over time its becomes not so great above $28.50 but that is a long way away.

Its the usual story .... late 2018 I bought so many banks when it was end of the world ... NAB I ended up with a lot of ...

As it rose ... I reduced and by rise I mean a rise above $28- ----- this year the doomsayers selling at lows are out for Westpac.

Same rules ,,, different year ... different bank but identical or close to enters and exits.
NAB went from below $24= to $30 ish .

I am always amazed when the value, underlying value of stock represented by the price falls and people should be more enthused, more bullish .... retail types are the opposite and actually buy at the peaks and sell at the lows.

Buy high ... sell low ... brilliant .... be bullish at the peaks ... and bearish at the lows. Yes of course the industry has been paying too much i n dividends and that Australia is implementing capital requirements the USA and EU will unlikely enforce till 2024 and beyond ... this has very clearly has already been taken into account with the actual price. Instead of rising with inflation and GDP growth and underlying profit rises, we are essentially reflecting the new normal of much more capital being held to protect depositors.

Suggesting some new bitcoin or other medium will replace banks is absurd in the extreme. If it were to occur, which of course is a maybe, the same security and capital reserve requirements would be insisted upon as actual banks. Since these tin bit computer generated coins have no underlying value and no reserves and 17 odd billion has been stolen in 2019 so far, I for one think its unlikely I will be seeing there emergence anytime soon.


Buy high ... sell low ... brilliant .... be bullish at the peaks ... and bearish at the lows.

Are we near the low or high ?

 

[kid hustlr]

Slightly OT, but has anyone done some quantitative work around performance of stocks post a dividend cut?
For example the average return post a dividend cut is xyz:

Specific WBC example aside I would imagine a dividend cut is a pre-cursor for poor future performance, but I haven't done the work.

 

[Student of Gann]

24.26 Low 25th November should hold with minor uptrend indicated till 10th November at 25.70 or 28.70 . Major Low is indicated 10th January 2020.

​

 

[qldfrog]

You mean top on 10/12?then down to January

 

[Student of Gann]

Thanks for picking that up . Yes counter trend rally into 10th December before resumption of downtrend .

 

[sptrawler]

Banking is one of those quasi-government industries really. No matter whether it's privately owned or run by government it's never going to be too far removed from government intervention.

Others in that category include all forms of commercially supplied energy, water, hospitals, mainstream media and any dominant transport operator (toll roads, rail either the track or the trains, aviation especially Qantas).

I don't outright avoid such companies but I'm always aware that to some extent they're effectively privately owned listed arms of government at risk of politics. I'm not saying it's wrong or right just that it is.

On the same note, a while back I bought into Qantas at 96cents, it was all doom and gloom, I also bought into and sold Air NZ similar sentiment doom and gloom, yet they are both quasi Government companies.
The banks move free up and tighten up money flow as per RBA request, the Government overseas the RBA, the 4 Banks are required to be too big to fail.
How that all relates to doom and gloom, I am really having trouble reconciling, I wont be selling.
Having said that, I have ridden a few into the ground.

 

[Smurf1976]

The banks move free up and tighten up money flow as per RBA request, the Government overseas the RBA, the 4 Banks are required to be too big to fail.

To clarify - I'm not saying don't invest in things which are close to government, just to be aware of the environment such companies operate in.

Nobody should be surprised if they invest in a major airline, bank, energy company etc and find government taking a keen interest in what the business is doing and exerting some influence. It's just something to be aware of unlike, say, a fashion retail chain which is pretty far removed from that sort of thing.

I do agree though that there's a buying opportunity here and the only doubts are regarding the detail - waiting for the absolute bottom versus buying somewhere reasonably near.

 

[sptrawler]

Very true smurf, Country boy bought WBC at 95c, I bought at $2.40.
So as always, buyer beware.

 

[qldfrog]

And I agree they are dinosaurs and in a natural economy, they would die, but we are not in a capitalist world,
after a nice dinner in Canberra, the fintech will see its license not renewed. A company will see its support based on an LGBT stance or a sex ration on the board..So from an economic stance, the big 4 are rubbish a la GM/Ford in the US . Dinosaurs of a past area but the power in charges are the same, so they will die a very long death..look at telstra..still around...

 

[tinhat]

I sold half the SMSF holding of WBC today. Half can stay in the bottom draw no worries as the SMSF will hopefully still be around in 40 years time, but there are better opportunities elsewhere for the other half.