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Westpac Banking : MI Leading Index June (PDF 125KB)

07/20/2021 | 08:44pm EDT

Bulletin

21 July 2021

Leading Index growth rate continues to fall

The six-month annualised growth rate in the Westpac-

Melbourne Institute Leading Index, which indicates the likely pace of economic activity relative to trend three to nine months into the future, slowed from 1.68% in May to 1.34% in June.

The growth rate in the Leading Index peaked at 5% back in November last year shortly after 22 consecutive negative prints and a particularly large -6% during last year's national COVID lock-down. It has since fallen back to 1.34%, still comfortably above zero and therefore signalling the outlook for above trend growth.

On July 20 Westpac revised its near-term growth forecasts to take account of the lock-downs in both NSW and Victoria. We now expect that the NSW economy will contract by 3.1% in the September quarter and the Victorian economy will contract by 0.1%.

That assumes the NSW lockdown will last a total of eight weeks and the Victorian lockdown three weeks. Contractions in the two biggest states will mean that the national economy is likely to contract by 0.7% in the September quarter.

We expect the economy to bounce back once measures bring outbreaks under control, with the December quarter expected to show a 2.5% rebound nationally. Further disruptions should become more limited as border controls tighten

and vaccination rates surge - the latter likely to get a big boost once adequate supplies of Pfizer and Moderna arrive from August on and as vaccination hesitancy/complacency tumbles.

That would see Australia's growth rate down from our previous estimate of 4.8% to 4.4% - still comfortably above trend.

Those forecasts are based on there being no extended lockdowns similar to the current Sydney lockdown in the December quarter. As Australia moves rapidly to a globally competitive vaccination rate through the first quarter of 2022 lockdowns can be expected to be much less frequent.

Growth can be expected to remain above trend through 2022.

That robust underlying momentum is clear in the latest Leading Index read. Over the last six months growth in the Leading Index has slowed from an extremely strong 4.20% to a more subdued, but still strong, 1.34% pace.

Six of the eight components have contributed to the 2.9ppt slowdown with the biggest shifts coming from: US industrial production (contributing -1.2ppts); total hours worked (-0.7ppts); the Westpac-MI Consumer Expectations Index (-0.5ppts); with the Westpac-MI Unemployment Expectations Index and dwelling approvals each shaving another 0.3ppts of the growth pace.

Recent lockdown measures have had some impact - Victoria's 14-day lockdown in June impacted total hours worked, and both this and the NSW lockdown hit consumer sentiment- based measures through both June and July. However, the full hit has yet to show through with the impact from the further tightening in restrictions in NSW, the return to another

Westpac-MI Leading Index

% ann

% ann

4

six month annualised growth rate

long term trend

4

2

2

0

0

-2

post-GST

-2

-4

slowdown

-4

GFC

-6

Sources: Westpac-Melbourne Institute

COVID-19

-6

Jun-93

Jun-97

Jun-01Jun-05

Jun-09

Jun-13

Jun-17

Jun-21

extended lockdown in Victoria, and additional measures in other states set for coming months.

While the slowing in momentum has been broadly based, commodity prices have provided some offset. Prices have posted a remarkable 27% surge in AUD terms since the start of the year, building on a robust 22% gain over the second half of 2020. The surge has seen this component add another 0.2ppts to the index growth rate since the start of the year.

Rising commodity prices now account for just over a third of the 1.34% growth in the headline index.

The Reserve Bank Board next meets on August 3. We expect the Board will be advised of significant downward revisions for growth in the September quarter, possibly in line with our own views that there will be a contraction.

In the near term, with the cash rate at its effective low of 0.1% policy flexibility is only available through the Bank's bond purchase program. The Minutes of the Board's July meeting noted: "Given the high degree of uncertainty about the economic outlook, members agreed that there should be flexibility to increase or reduce weekly bond purchases in the future, as warranted by the state of the economy at the time."

The August Board meeting would be an appropriate time to use that flexibility. At the least it could announce that the taper in purchases from $5 billion to $4 billion which was planned for early September will be deferred.

A better approach, in keeping with the need to be seen to be supporting the economy at a difficult time, would be to announce a review of the program at or before the September meeting where the current purchase rate of $5 billion per week could be lifted to $6 billion rather than reduced to $4 billion.

Indeed, a decision to immediately lift purchases to $6 billion per week would certainly send the right signal that the Bank is responsive to economic developments and is prepared to use its new flexible policy tool accordingly.

Bill Evans, Chief Economist

Past performance is not a reliable indicator of future performance. The forecasts given above are predictive in character. Whilst every effort has been taken to ensure that the assumptions on which the forecasts are based are reasonable, the forecasts may be affected by incorrect assumptions or by known or unknown risks and uncertainties. The results ultimately achieved may differ substantially from these forecasts.

1

Disclaimer

© Copyright 2021 Westpac Banking Corporation

Things you should know.

Westpac Institutional Bank is a division of Westpac Banking Corporation ABN 33 007 457 141 ('Westpac').

Disclaimer

This material contains general commentary only and is not intended to constitute or be relied upon as personal financial advice. To the extent that this material contains any general advice, it has been prepared without taking into account your objectives, financial situation or needs, and because of this, you should, before acting on it, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs, and, the disclosure documents (including any product disclosure statement) of any financial product you may consider. Certain types of transactions, including those involving futures, options and high yield securities give rise to substantial risk and are not suitable for all investors. We recommend that you seek your own independent legal or financial advice before proceeding with any investment decision. This material may contain material provided by third parties. While such material is published with the necessary permission none of Westpac or its related entities accepts any responsibility for the accuracy or completeness of any such material. Although we have made every effort to ensure the information is free from error, none of Westpac or its related entities warrants the accuracy, adequacy or completeness of the information, or otherwise endorses it in any way. Except where contrary to law, Westpac and its related entities intend by this notice to exclude liability for the information. The information is subject to change without notice and none of Westpac or its related entities is under any obligation to update the information or correct any inaccuracy which may become apparent at a later date. The information contained in this material does not constitute an offer, a solicitation of an offer, or an inducement to subscribe for, purchase or sell any financial instrument or to enter a legally binding contract. Past performance is not a reliable indicator of future performance. Whilst every effort has been taken to ensure that the assumptions on which the forecasts are based are reasonable, the forecasts may be affected by incorrect assumptions or by known or unknown risks and uncertainties. The ultimate outcomes may differ substantially from these forecasts.

Country disclosures

Australia: Westpac holds an Australian Financial Services Licence (No. 233714). This material is provided to you solely for your own use and in your capacity as a wholesale client of Westpac.

New Zealand: In New Zealand, Westpac Institutional Bank refers to the brand under which products and services are provided by either Westpac or Westpac New Zealand Limited ("WNZL"). Any product or service made available by WNZL does not represent an offer from Westpac or any of its subsidiaries (other than WNZL). Neither Westpac nor its other subsidiaries guarantee or otherwise support the performance of WNZL in respect of any such product. The current disclosure statements for the New Zealand branch of Westpac and WNZL can be obtained at the internet address www.westpac.co.nz. For further information please refer to the Product Disclosure Statement (available from your Relationship Manager) for any product for which a Product Disclosure Statement is required, or applicable customer agreement. Download the Westpac NZ QFE Group Financial Advisers Act 2008 Disclosure Statement at www.westpac.co.nz.

China, Hong Kong, Singapore and India: This material has been prepared and issued for distribution in Singapore to institutional investors, accredited investors and expert investors (as defined in the applicable Singapore laws and regulations) only. Recipients in Singapore of this material should contact Westpac Singapore Branch in respect of any matters arising from, or in connection with, this material. Westpac Singapore Branch holds a wholesale banking licence and is subject to supervision by the Monetary Authority of Singapore. Westpac Hong Kong Branch holds a banking license and is subject to supervision by the Hong Kong Monetary Authority. Westpac Hong Kong branch also holds a license issued by the Hong Kong Securities and Futures Commission (SFC) for Type 1 and Type 4 regulated activities. This material is intended only to "professional investors" as defined in the Securities and Futures Ordinance and any rules made under that Ordinance. Westpac Shanghai and Beijing Branches hold banking licenses and are subject to supervision by the China Banking and Insurance Regulatory Commission (CBIRC). Westpac Mumbai Branch holds a banking license from Reserve Bank of India (RBI) and subject to regulation and supervision by the RBI.

UK: The contents of this communication, which have been prepared by and are the sole responsibility of Westpac Banking Corporation London and Westpac Europe Limited. Westpac (a) has its principal place of business in the United Kingdom at Camomile Court, 23 Camomile Street, London EC3A 7LL, and is registered at Cardiff in the UK (as Branch No. BR00106), and (b) authorised and regulated by the Australian Prudential Regulation Authority in Australia. Westpac is authorised in the United Kingdom by the Prudential Regulation Authority. Westpac is subject to regulation by the Financial Conduct Authority and limited regulation by the Prudential Regulation Authority. Details about the extent of our regulation by the Prudential Regulation Authority are available from us on request. Westpac Europe Limited is a company registered in England (number 05660023) and is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority.

This communication is being made only to and is directed at (a) persons who have professional experience in matters relating to investments who fall within Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (the "Order") or (b) high net worth entities, and other persons to whom it may otherwise lawfully be communicated, falling within Article 49(2)(a) to

  1. of the Order (all such persons together being referred to as "relevant persons"). Any person who is not a relevant person should not act or rely on this communication or any of its contents. The investments to which this communication relates are only available to and any invitation, offer or agreement to subscribe, purchase or otherwise acquire such investments will be engaged in only with, relevant persons. Any person who is not a relevant person should not act or rely upon this communication or any of its contents. In the same way, the information contained in this communication is intended for "eligible counterparties" and "professional clients" as defined by the rules of the Financial Conduct Authority and is not intended for "retail clients". With this in mind, Westpac expressly prohibits you from passing on the information in this communication to any third party. In particular this communication and, in each case, any copies thereof may not be taken, transmitted or distributed, directly or indirectly into any restricted jurisdiction. This communication is made in compliance with the Market Abuse Regulation (Regulation(EU) 596/2014).

Disclaimer

Disclaimer continued

Investment Recommendations Disclosure

The material may contain investment recommendations, including information recommending an investment strategy. Reasonable steps have been taken to ensure that the material is presented in a clear, accurate and objective manner. Investment Recommendations for Financial Instruments covered by MAR are made in compliance with Article 20 MAR. Westpac does not apply MAR Investment Recommendation requirements to Spot Foreign Exchange which is out of scope for MAR.

Unless otherwise indicated, there are no planned updates to this Investment Recommendation at the time of publication. Westpac has no obligation to update, modify or amend this Investment Recommendation or to notify the recipients of this Investment Recommendation should any information, including opinion, forecast or estimate set out in this Investment Recommendation change or subsequently become inaccurate.

Westpac will from time to time dispose of and acquire financial instruments of companies covered in this Investment Recommendation as principal and act as a market maker or liquidity provider in such financial instruments.

Westpac does not have any proprietary positions in equity shares of issuers that are the subject of an investment recommendation.

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Individuals who produce investment recommendations are not permitted to undertake any transactions in any financial instruments or derivatives in relation to the issuers covered by the investment recommendations they produce.

Westpac has implemented policies and procedures, which are designed to ensure conflicts of interests are managed consistently and appropriately, and to treat clients fairly.

The following arrangements have been adopted for the avoidance and prevention of conflicts in interests associated with the provision of investment recommendations.

  1. Chinese Wall/Cell arrangements;
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  3. Strict and well defined wall/cell crossing procedures;
  4. a "need to know" policy;
  5. documented and well defined procedures for dealing with conflicts of interest;
  6. reasonable steps by Compliance to ensure that the Chinese Wall/Cell arrangements remain effective and that such arrangements are adequately monitored.

U.S.: Westpac operates in the United States of America as a federally licensed branch, regulated by the Office of the Comptroller of the Currency. Westpac is also registered with the US Commodity Futures Trading Commission ("CFTC") as a Swap Dealer, but is neither registered as, or affiliated with, a Futures Commission Merchant registered with the US CFTC. Westpac Capital Markets, LLC ('WCM'), a wholly-owned subsidiary of Westpac, is a broker-dealer registered under the U.S. Securities Exchange Act of 1934 ('the Exchange Act') and member of the Financial Industry Regulatory Authority ('FINRA'). This communication is provided for distribution to U.S. institutional investors in reliance on the exemption from registration provided by Rule 15a-6 under the Exchange Act and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors in the United States. WCM is the U.S. distributor of this communication and accepts responsibility for the contents of this communication. All disclaimers set out with respect to Westpac apply equally to WCM. If you would like to speak to someone regarding any security mentioned herein, please contact WCM on +1 212 389 1269. All disclaimers set out with respect to Westpac apply equally to WCM.

Investing in any non-U.S. securities or related financial instruments mentioned in this communication may present certain risks. The securities of non-U.S. issuers may not be registered with, or be subject to the regulations of, the SEC in the United States. Information on such non-U.S. securities or related financial instruments may be limited. Non-U.S. companies may not subject to audit and reporting standards and regulatory requirements comparable to those in effect in the United States. The value of any investment or income from any securities or related derivative instruments denominated in a currency other than U.S. dollars is subject to exchange rate fluctuations that may have a positive or adverse effect on the value of or income from such securities or related derivative instruments.

The author of this communication is employed by Westpac and is not registered or qualified as a research analyst, representative, or associated person under the rules of FINRA, any other U.S. self-regulatory organisation, or the laws, rules or regulations of any State. Unless otherwise specifically stated, the views expressed herein are solely those of the author and may differ from the information, views or analysis expressed by Westpac and/or its affiliates.

Disclaimer

Westpac Banking Corporation published this content on 21 July 2021 and is solely responsible for the information contained therein. Distributed by Public, unedited and unaltered, on 21 July 2021 00:43:09 UTC.


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