Across the Australian Equity component of investor accounts we have bought Westpac Banking Corporation (WBC). Westpac Banking Corporation is Australia’s oldest banking and financial services group, with branches and operations throughout Australia, New Zealand and the near Pacific region as well as offices in key cities around the world. This purchase has been funded from the sale of Commonwealth Bank of Australia (CBA).

We are positive on the medium-term outlook for WBC for the following reasons:

• It has a relatively low risk business mix with overweight exposure to retail banking, as represented by peer group leading impairments performance;
• Operating expenses are being well managed and the ongoing efficiency program is delivering consistent annual savings;
• The balance sheet is strong with ongoing organic capital generation positioning it well for expected increases in core tier 1 capital requirements. Along with its peers it is amongst the best capitalised banks in the world;
• With bond yields low Westpac (and the banking industry generally), will continue to find support from retail investors given their attractive fully franked dividend yield.

As with all investments it is not without risks which include increased pressure on Bank margins from lower interest rates and cost pressures, exposure to the domestic housing market and ongoing regulatory scrutiny following the recent Hayne Royal Commission.

The purchase was funded from the sale of CBA. While their businesses are largely the same, there is a large valuation differential between WBC and CBA, beyond the historic premium that CBA has been afforded (with WBC at 1.5 times price to book value and CBA 2.1 times). This in conjunction with the fact that CBA has just gone ex-dividend for its FY19 final dividend, we believe WBC offers greater income and has greater valuation support over the medium term.

For more information refer to the Westpac Banking Corporation Snapshot.