In line with our previously stated view that it makes sense to adopt a proactive approach to enhancing income for clients via high yielding fully franked dividends in an environment where earnings growth is muted, we have bought Westpac Group (WBC) across client accounts that have selected the ‘Income’ Australian equity option. This purchase was funded by the sale of Commonwealth Bank of Australia (CBA) which has recently gone ex-dividend.

The two banks are broadly exposed to the same macro factors with Westpac offering:

• a relatively low risk business mix;
• the potential for further home loan repricing;
• an efficiency program to help offset margin headwinds;
• leverage to the growing need for insurance & investment advice;
• a capital position that ranks amongst the best globally; and
• an estimated gross dividend yield of ~7.9%

As for the broader sector it is exposed to increased competition for new loans and higher funding costs that are pressuring net interest margins, an increase in bad debts and capital requirements under Basel IV that are more onerous than expected. If these risks result in a large profit decline, then dividends may be cut given the elevated payout ratio.

If you have any queries, please contact your Elston adviser.