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Why has the Westpac share price dropped today?


Westpac shares surged 43% over the past 12 months.

Shares in Westpac (ASX: WBC) have been the best performing among the Big Four banks over the last several months, making it an investor favourite. On Tuesday though, the stock was among the major decliners, down 1.6% at $25.39 at the time of writing.

Why is the Westpac stock declining?

Westpac shares have tripped in early trading after the bank delivered a mixed third quarter update amid COVID-19 headwinds.

On the positive side, Australia’s second biggest lender on Tuesday said excess capital and franking credits meant it could consider returning capital to investors.

However, a decision on this has been left until its annual results on 1 November which means Westpac is the only Big Four bank not to have announced a share buyback in recent weeks.

​​Chief executive Peter King said the lender’s balance sheet was in “good shape” and Westpac reported a proforma common equity tier 1 (CET 1) capital ratio of 12.5% at June-end. This was well above the banking regulator’s 10.5% "unquestionably strong" threshold.

However, growth in the key home loans market has fallen behind. Westpac said it is growing in line with the industry, although rivals CBA and NAB have reported growth exceeding industry levels.

The bank also flagged that net interest margins would be lower in the 6 months to 30 September, and that risk-weighted assets rose $8.5 billion in the June quarter to $437.4 billion.

Cost reduction at risk

Westpac on Tuesday declared that its annual 2021 expenses would be higher than last year. While it did not elaborate on the reasons, the announcement comes just months after Chairman John McFarlane indicated in a letter to shareholders that the bank was making progress on cost reductions.

The bank had outlined a major program to reduce its cost base to $8 billion by 2024, from more than $12.6 billion in 2020 through exits of non-core businesses, simplification of products and processes, automation and digitisation.

Analysts are concerned that the lack of progress could have an impact on the final dividend to shareholders.

Meanwhile, Westpac said following lockdowns in Sydney and Melbourne it has approved 3,700 deferrals for home loan customers with $1.6 billion in mortgages, and another 725 deferrals of business loans valued at $29.5 billion. Overall impairment provisions were stable at $5.54 billion for the June quarter.

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