According to Westpac (ASX: WBC) chief Peter King, the bank’s full year numbers were an “improved result”.

Indeed, the bank announced a 26 per cent lift in net profit while final divided was up 14 per cent on the prior fiscal 2022 year, both in line with expectations. Westpac also announced a $1.5 billion on-market share buyback.

On the growth front, loans trended upwards, with the bank reporting a 4 per cent lift in home loans and a 6 per cent increase in business loans. Customer deposits were also up 5 per cent. Net interest margins or NIM also improved to 1.95 per cent.

The bank has been a top stock pick for Morningstar and is also on our Best Ideas list. While Westpac struggled with long appoval times, compliance costs and higher costs, Morningstar remained confident that the major would see a return to strong profits and returns-on-equity over time.

On the fiscal 2023 numbers, is the outlook a little brighter for the challenged business.

“Westpac has disappointed on numerous fronts in recent years, but we think the renewed momentum in home and business lending volumes, improved NIM, and a lower cost/income ratio are encouraging signs things are heading in the right direction,” Morningstar senior analyst Nathan Zaia said.

Expenses were down just one per cent with Westpac’s King recognising that “there’s more work to do as we seek to lower our cost-to-income ratio relative to peers”.

Morningstar’s Zai highlights that inflationary pressures and investment spending drove the 5 per cent boost in second-half operating costs. He notes that a 6 per cent cut in staff in the second half of fiscal 2023 will help ease wage costs in fiscal 2024.

Return on equity was 10 per cent, up from just 8 per cent in the last year and much closer to the 11 per cent returns Morningstar expects from a wide-moat major bank over the medium term.

The bank also announced it would adopt technology simplification to also help cut its costs. Zaia said the “details were scant” but the bank is now positioned to redirect investment spending from regulatory and compliance projects to technology improvements particularly as customer remediation and risk compliance projects are finalised. “This will lower operating costs and potentially improve the customer experience.”

Dividend growth?

In terms of whether its growth momentum can continue, Zaia thinks the bank can grow loans and deposits roughly in line with the market, without resorting to heavy discounting. “The bank's new mortgage origination platform has reportedly improved approval times and should provide a platform to lift broker satisfaction further.”

Furthermore, while Westpac has clawed back market share by pricing loans below their major bank peers, Zaia highlights that it has been able to manage the discounts offered to “retain existing customers quite well.”

Its $1.5 billion buyback also reflected the capital strength of the bank and Zaia expects a moderate uptick in dividend growth as the bank tweaks the payout ratio higher on lower earnings in fiscal 2024.

“We see headroom to do this given the strong capital position.” A position so strong, adds Zaia that despite uncertainty around future loan losses, Westpac was comfortable to announce the buyback.

He is also comfortable that the bank will continue to have surplus capital to further support dividend payments, growth in the loan book and annual investment spend.
Importantly credit stress remains low, with mortgage 90-day delinquencies trending back to September 2019 levels.