First, it was NAB, then ANZ and now Westpac (ASX:WBC) . The stereotypical safe investments are not looking so safe anymore. Profit plunges, dividend cuts, and frozen mortgage paymentsscream banking instability.
Article Outline 1. WBC posts disappointing H12020 financials. 2. Why is Westpac up after poor financials? 3. Is WBC even worth considering?
H1 2020 Financials
- Statutory net profit down 62% = $1.1 billion.
- Cash earnings down 70% = $993 million.
- Earnings per share (EPS) down 71% = 28 cents.
- Impairment charge of 2.2 billion = Including possible COVID-19 impacts.
- Decision to slash dividend deferred.
Westpac is financially suffering on all fronts. Similar to Germany towards the end of WW2. However, the financial carnage has only just begun. Because COVID-19 remains uncertain, and an economic recession is looming. Moreover, WBC is expecting COVID-19 to create a wave of bad loans from households and businesses.
CEO Mr. King is searching for possible asset sales across superannuation, retirement products, life insurance, and investments. However, asset sales will only mediate WBC’s financial fallout slightly.
Unappealing financials because of COVID-19 is just the tip of the iceberg. Underneath the water, WBC is still dealing with loan repayments from the Royal Commission, servicing their lawsuit, and trying to prepare for a recession. Thus, investors should strap themselves in for even greater losses come June 2020.
Mixed Market Reaction
Westpac’s shares were tumbling at the start of the day. Because of poor H1 financials and the weakness in US futures. However, the negative sentiment rapidly changed as a bullish run took off for the day.
The rally can leave many investors scratching their heads. Especially when WBC released a negative ASX announcement.
Tom Piotrowski provides a possible explanation for WBC’s unexpected market activity below. Essentially, WBC fell 39% in the GFC, and so far, COVID-19 caused a 35% decrease, making buyers think the worst is factored in. Also, with the economy reopening and restrictions getting relaxed, buyers are more optimistic. Thus, today represents opportunists snapping up WBC at a great price.
However, the long-term future for WBC’s share price is worrying. Because COVID-19 has no expiration date, and a recession is yet to wreak havoc.
Is WBC worth the long term investment?
Before I start, I am obliged to remind our viewers that this is not advice only general commentary from my extensive research in this area.
Let’s be honest, no one is investing in WBC for its dividend. Well, at least not anymore. Instead, people are only considering Westpac as a long-term hold because of its current discount.
Can WBC recover?
WBC, like the other banks and airlines, is essential to the Australian economy. Thus, Westpac will likely receive a bailout so that Australians can get back on their feet. Because Westpac is bailout-proof, I would argue WBC is a viable long-term investment. However, I firmly believe that Macquarie (ASX:MQG) and Commonwealth Bank(ASX:CBA) are better investments.
What is an attractive price?
Your economic outlook (bullish or bearish) dictates the price that you would deem desirable. Personally, I see the economy tanking, and thus, WBC suffering a prolonged bearish decline.
Businesses are frozen, causing irreversible damage, housing prices are plummeting, all while the government is devaluing our currency and burying itself in debt.
The mortgage payment dilemma would significantly decrease WBC’s profit. Also, the lack of business activity during COVID-19 should see WBC receive a wave of bad loans.
All in all, I would deem a nice entry point for WBC to be:
- $12.50-$13.50 factoring in a prolonged COVID-19 and a recession.
- $13.50 – $14 factoring in a prolonged COVID-19 but no recession.
- $14 – $14.50 if COVID-19 fizzled out in the coming months.
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The information above should not be taken as financial advice. Youth Investment Group has no liability for personal financial interests or investment decisions. You should make your own investment decisions based upon your own research and what you believe is best for you.
Written by Patrick McLoughlin, Senior Manager of YIG.