Westpac: Sell This Bank As The Australian Economy Slows Down

Australia's second largest lender, Westpac Banking Corporation (WBK), reported lower than expected performance for the year 2012, on November 5, 2012, strengthening our bearish stance on the stock. Cost for soured loans, which surged 22% year over year, was said to be the main reason for the miss. The bank reduced 5% of its workforce during the most recent year. Going forward, we believe the bank will shed further workforce in order to reduce expenses, as higher cost of funds continues to compress the net interest spread that the bank earns.

In conclusion, we believe the bank will face a challenging outlook, as consumer sentiment and manufacturing within Australia remains weak. If the mining bubble bursts, it will also have an adverse impact on the bank. We expect the central bank of Australia to announce a cut in cash rate to stimulate manufacturing output and consumer confidence. In such a scenario, the bank will face further compression in its net interest spread. Therefore, we reiterate our bearish stance on the stock.
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