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Why is the Westpac share price higher today?

Posted: 3 February 2022 1:04 pm
News
Westpac-shares-03Feb_1800x1000_Finder

Westpac shares are down 17% over the past 6 months – the worst performance among the Big Four banks.

Shares in banking major Westpac (ASX: WBC) are the best performing of the Big Four banks on Thursday.

Westpac shares were up 2.3% to $21.20 at the time of writing. By comparison, shares in top lender Commonwealth Bank (ASX: CBA) were down 1.1%, while National Australia Bank (ASX: NAB) and ANZ (ASX: ANZ) were up 0.25% each.

What is lifting the Westpac stock price?

Westpac on Thursday posted a trading update for the December quarter. Australia’s second-biggest lender reported better than expected unaudited cash earnings for the quarter, up 1% to $1.58 billion, excluding notable items.

It improved its loan book by $5 billion but the net interest margin for the quarter, a key measure of profitability, fell 8 basis points in the first quarter to 1.91%.

On the positive side, the lender outlined a $191 million reduction in expenses, helped in part by the decline of 1,100 full-time equivalent employees and third-party contractors, despite further investment in the franchise and ongoing programs to improve risk management.

Chief Executive Peter King said the bank was now implementing a key plank of its 2021 cost reduction strategy, creating a smaller, more focused head office and reducing the size of corporate functions by 20%.

Westpac reiterated that it was on track to meet the target of reducing its cost base to $8 billion by 2024.

Margin concerns

The positive news comes as a relief to investors after a difficult second half last financial year when the bank missed earnings estimates, leading to multiple broker downgrades.

However, the concern over margin pressure amid rising competition continues. Westpac attributed the lower margins in the December quarter to competitive pressure in mortgage and business lending and continuing growth in lower-spread fixed rate mortgages.

“The environment remains highly competitive, and we continue to see pressure on margins,” Westpac chief financial officer Michael Rowland said.

“Given this, we are bringing forward our simplification plans and changing our operating structure to improve efficiency and move more of our people closer to the customers they support.”

As part of the changes, the bank will combine the chief risk officer role with responsibility for financial crime, compliance and conduct. It will also create 2 new divisions – corporate services, as well as customer services and technology, to drive further efficiency and productivity.

The results received an encouraging response from analysts.

“Early signs of cost reduction should provide investors some comfort that costs will likely decline through FY22 as guided," Citi analysts said in a note, while UBS said Westpac's results were better than expected on costs but weaker than expected on net interest margins and credit charges.

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