Hot stock: Westpac

WHAT'S NEW?

The banking mantra this year has been ''strong result in a low-growth economy'', and Westpac has followed the script. Cash earnings growth of 5 per cent and dividend growth of 6 per cent demonstrated how Westpac had negotiated the difficult environment in which corporate borrowing was weak and consumers were paying down personal balance sheets.

Westpac's cash earnings for the 12 months to September 30 this year were solid, coming in at $6.6 billion, an increase of 5 per cent on last year.

Westpac reorganised its divisions this year and it was the new Australian Financial Services Group that led the way. This division includes Australian retail banking, business banking and wealth operations, and increased its earnings by 14 per cent to $2.1 billion.

A theme in banking throughout 2012 has been the growth in deposits, and Westpac raised deposits by 11 per cent, or $13.4 billion.

In a low-credit-growth environment, the bank has been focused on cutting costs; its retail bank knocked off $31 million in operating costs by cutting 800 jobs. Overall, the Westpac Group lowered its full-time equivalent employee numbers to 35,675, which is the lowest of the big four.

Westpac's balance sheet is continuing to strengthen. It is well positioned for the new Basel III accord and for any further unseen global economic shocks.

OUTLOOK

Australian banks always have plenty of opinions on the direction of the local economy, because their earnings stem from their understanding of domestic economic conditions. Westpac believes GDP growth in Australia will reach 3.2 per cent in the 2013 calendar year, a small decline on the 2012 figure of 3.5 per cent, but with a further decline in 2014 to 2.8 per cent. However, Westpac will no doubt benefit if forecasts of 5.5 per cent credit growth during the next two years are on the money. Westpac has arguably outperformed its peers in cutting costs this year. It also stands to gain from improvements in its wealth management arm, which we see as a sector investors should be exposed to in the long term.

PRICE

Westpac shares have performed well in 2012, rising by about 25 per cent in the year to date. This puts them ahead of the game compared to other banking stocks, but for good reason in our view. A key target for the shares is now $28.50, and if it breaks this further, strong upward momentum may ensue.

WORTH BUYING?

We think Westpac remains one of the best exposures to the Australian banking sector. We further believe that retaining a strong exposure to Australian banks is a good investment strategy.

Westpac continues to offer considerable appeal from a valuation perspective and on income grounds.

Greg Fraser is an analyst at Fat Prophets sharemarket research.

The story Hot stock: Westpac first appeared on The Sydney Morning Herald.

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