Westpac costs disappoint but shares 'attractively valued': UBS

It was a one step forward, two steps back kind of narrative for Westpac Bank's (ASX: WBC) full year results, according to UBS, as an earnings beat was offset by weaker-than-expected net interest margins and a higher cost outlook.

"Westpac's full year result was disappointing for the market, even though cash EPS was in-line with consensus and 2H22 dividend stronger," UBS analysts said in a note on Wednesday.

All-important net interest margins sat at 1.90% in the second-half, which UBS considers to be "a bit soft, especially with ANZ and Bank of Queensland posting strong sequential trends thus creating the expectation for a NIM beat."

Cost ambitions remain a stretch

Westpac revised its FY24 cost target from $8.0 bn to $8.6bn as:

• Inflation was higher than initially assumed

• Persistence of regulatory and compliance costs beyond FY23

"However, we continue to believe this is an ambitious target with UBSe $9.2bn," notes UBS.

Margin expansion through to FY24

"Westpac has guided for continued positive NIM momentum into 1H23, though note headwinds from increasing competition and higher wholesale funding costs will begin to come into play," the analysts said.

Net interest margins are projected to rise by 11 basis points in the first-half of FY23 and "remain high in the near term".

Positive rating and target price unchanged

The investment bank remains Buy rated on Westpac for its "attractive valuation and underlying strengths." A $27.00 target price was also retained.

FY23-25 cash earnings per share was downgraded by 7-12%, reflecting higher-than-expected costs, which was partially offset by higher net interest income and an improved bad debt outlook.

Still, the bank trades at a price-to-earnings of 10.6 (2 year forward earnings), well below its historical average of 12.2 times and a 17% discount to the ASX 200 banks index, according to UBS.

Westpac Bank share price chart