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Westpac Update & Possible New Hybrid

Westpac released its first quarter 2016 capital and asset update (Pillar 3) on Friday. The common equity tier 1 (CET1) ratio improved by 0.7% to 10.2% on an APRA basis and is 14.3% on an internationally comparable basis. Total capital increased by 0.6% to 13.9% and the capital stack saw a modest reduction in additional tier 1 (AT1, from 1.9% to 1.8%).

 

The 2006 Westpac Trust Preferred Securities (WTPS, $763 million) will cease being eligible as additional tier 1 capital at the end of June this year. Consequently Westpac are considering a hybrid transaction subject to market conditions and also announced intentions to redeem the 2004 WTPS (US$525 million) at the end of March 2016.

 

This will add to the supply of longer dated hybrids this year and it will be interesting to see how this impacts secondary trading of PERLS VIII once the CBA issue lists on the ASX on the 4th April 2016. Post the PERLS VIII announcement hybrids have generally rallied justifying the call to buy longer dated hybrids that had been trading above the PERLS VIII issue margin floor of 5.2% that offered better value at the time.

 

PERLS III investors considering switching into the higher margin PERLS VIII security will have to determine whether the additional margin on offer provides sufficient premium to compensate for an extra 5.5 years of term risk that they are buying.

 

Westpac’s Liquidity Ratio is a robust 129% (vs 121% September 2015), or $30 billion in excess of requirements and its stable funding ratio is 84%.

 

Financial year to date Westpac have issued $14 billion in wholesale funding with a weighted average maturity of 5.1 years (with just over half of issuance in the 5 year maturity bucket). Issuance has been across various currencies with preference for US$ (53%) followed by A$ (20%).

 

Overall asset quality was stable over the quarter with only minor moves in credit charges:
• Westpac’s reported exposure to the mining sector was $13.4 billion (1.4% of tangible common equity, down from 1.54%), impairments up (2 basis points to 0.3%) and the percentage of the portfolio graded as stressed (up by 0.36% to 2.22%) over the quarter; and
• 90+ day Australian mortgage delinquencies up 0.01% to 0.46%, with a modest uptick in arrears in most states but more noticeable in Western Australia. Westpac remains more exposed to NSW & ACT (40% versus the Australian banking system 35%) and Vic & Tas (26% Vs 27%) with an underweight to Qld (17% Vs 18%) and WA (10% Vs 13%).