Australian Equities Income Portfolio
We have sold the Westpac Banking Corporation (WBC) position in the Income Portfolio and reinvested the proceeds into our existing holdings in National Australia Bank (NAB), Metcash (MTS), and Premier Investments (PMV). The decision to exit our WBC position reflects our more cautious approach toward the bank’s ability to execute its strategies of cost reduction and catching up with other major banks in terms of revenue growth and Return on Equity (ROE).
In May this year, WBC abandoned its FY24 absolute cost target of $8.6 billion and shifted its focus to reducing its cost-to-income ratio to align with its peers. However, substantial investments in technology, cybersecurity, and compliance have continued to place pressure on its expenses. Furthermore, ongoing competition and inflation have cast uncertainty over the trajectory of cost growth. At WBC’s 3Q23 market update in August, underlying costs increased by 5% through the half, primarily due to significantly higher wage and supplier expenses, as well as slightly elevated bad & doubtful debt (BDD) charges.
In contrast to CBA’s deliberate decision to prioritise return on capital over market share, WBC’s determination to prevent further mortgage market share loss during the current refinancing boom indicates that mortgage headwinds are likely to persist into FY24. Amongst other major banks, WBC exhibits the lowest ROE of 11.3% among major banks as of 31 March 2023, and on consensus estimates it will fall below 9% in FY24.
Our preference for NAB over WBC is based on its higher quality, characterized by a stronger franchise and more effective management execution. NAB has demonstrated better management execution and cost control compared to WBC, achieving the highest levels of productivity over the last three years and reiterated the FY23 cost savings of $400 million in its latest 3Q23 trading update.