Where next as the Westpac share price plunges following Q3 update?

Westpac stock falls on latest trading update

The Westpac Banking Corporation (WBC) share price fell as much as 4.3% – to an intraday low of $16.83 per share – following the release of the bank’s third quarter (Q3) trading update.

Overall, the bank said it would not be paying its previously deferred interim (H1) dividend, that statutory net profits and cash earnings had both improved against the first-half quarterly average, and that approximately $30 billion worth of mortgages were currently being deferred.

At the time of writing the stock traded modestly off its morning lows, trading just above the $17 level.

Looking forward and in response to today’s update, analysts from Macquarie Wealth Management argued that:

‘While softer margins, a higher impairment charge, and a lower capital position can all be explained and rationalised, it is hard to see how WBC can re-rate on the back of today’s announcement, despite looking fundamentally cheap relative to peers.’

Macquarie has a Neutral rating and a 12-month price target of $17.50 on Westpac, suggesting some upside from current price levels.

The Q3 unpacked

On the bottom-line, the retail-focused Westpac reported a robust set of unaudited results. Here, third quarter statutory net profits came in at $1.12 billion (against a quarterly H1 average of $595 million); while cash earnings came in at $1.32 billion (against a quarterly H1 average of $497 million).

The bank noted that these strong results were driven by lower impairment charges, though flagged that margins remain under pressure – with WBC reporting a Q3 net interest margin (NIM) of 2.05% – as historically low interest rates drag on bank profitability across the board.

Elsewhere, Westpac booked an impairment charge of $826 million during the quarter, in a move aimed at 'further increasing provisions and provisioning cover.'

On the asset side of things, Westpac revealed that ~78,000 of its customers – with mortgages totalling $30 billion – continue to benefit from loan deferrals.

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Westpac share price: a question of dividends

In a move that likely disappointed income-focused investors, the bank today revealed that it would not be paying an interim dividend in FY20. Ongoing uncertainty and the desire to maintain balance sheet strength were the reasons cited for the decision.

For reference, as part of the FY20 interim results WBC’s Board said it would be deferring the interim dividend, citing the economic uncertainty created by Covid-19 as the primary reason.

Westpac looks to have played a similar card today: noting that the Board would revisit its dividend plans as part of the full-year (FY20) results – set to be released on 3 November.

Analysts from Macquarie Wealth Management currently expect Westpac to declare a 40 cents per share final dividend at its FY20 results, significantly down on the bank’s 2019 full-year dividends which totalling 174 cents per share.