Analyst Note| Nathan Zaia |
Westpac’s first-half fiscal 2021 result was solid, with cash profit of AUD 3.5 billion up 256% on first half 2020 and 119% on second-half 2020. The most interesting news is management’s aggressive target to bring costs down by approximately 15%, or AUD 1.5 billion, to AUD 8 billion by fiscal 2024. The reductions exclude costs from businesses earmarked for divestment. We think there is a high chance the bank falls short on its target given changes could begin to impact customer and employee satisfaction, and see the bank lose market share. In addition, there could also be unforeseen costs around risk and compliance, regulatory change, or competitive disruptions. We have lowered our long-term operating cost forecasts by 5%, which implies an underlying cost base of AUD 9.5 billion by fiscal 2024. We increase our fair value estimate by 7.5% to AUD 29 after factoring in a portion of the planned lower costs and the time value of money. Shares traded up 5% on the day of the result and trade at a 9% discount to our updated fair value estimate.