Bad debts overhang Westpac: analysts

Further bad debts are one of the few clouds now overhanging Westpac Banking
Corporation after the bank raised $3 billion in new capital, analysts say.
While analysts downgraded Westpac's fiscal 2009 earnings per share (EPS) forecasts,
its successful raising on Tuesday was applauded for placing its balance sheet in
good shape at this vulnerable part of the credit cycle.
A week after swallowing St George, Westpac placed $2.5 billion with institutions on
Tuesday at $16.00 per share and said it would offer another $500 million to retail
investors through a non-underwritten share purchase plan.
The bank's equity raising will boost its tier 1 capital ratio to around 8.32 per
cent, on a pro-forma basis - the second highest of the Big Four banks behind
National Australia Bank (NAB), which raised $3 billion from institutions last month.
Tier 1 capital ratios need to be above eight per cent in this part of the credit
cycle, Citi analysts wrote in a note to clients.
"Westpac's strong capital position can now withstand an early 1990s (recession)
scenario," Goldman Sachs JBWere's (GSJBW) James Freeman, Ben Koo and Elizabeth
Rogers wrote.
They said their forecasts already accounted for a significant deterioration in the
bad debt cycle.
Westpac's move came after its earnings for the first two months of fiscal 2009 were
hit by higher impairment provisions, including the top-up to provisions for
previously announced exposures, including Allco and ABC Learning, as well as for one
corporate downgrade, the bank said.
The bank said it has also set aside a $500 million buffer for "acquisition
adjustments" from its $15 billion takeover of St George that could be used to either
prop up the St George acquisition, cover future dividends or make acquisitions.
Citi said this was likely to include top up payments on St George's provisioning
levels, recognising the inadequate coverage ratios prevailing for St George at the
time of its acquisition.
Expected negative earnings growth in fiscal 2009 will come mainly from a large
increase in bad debt provisions, the integration of St George and Tuesday's capital
raising, GSJBW said while Citi noted this was a sector-wide risk.
Citi downgraded its fiscal 2009 EPS for Westpac by 4 per cent, while GSJBW's EPS
forecast is 3.4 per cent weaker for the year, and Merrill Lynch has downgraded its
EPS forecast by 5.2 per cent.
Merrill Lynch has a Buy recommendation on the stock, while Citi and GSJBW are
advising clients to Hold shares.
Westpac's shares lost $1.51, or 8.45 per cent, to $16.37.