Macquarie upgrades Westpac

Macquarie Securities has upgraded Westpac to "outperform", arguing in a report issued last week that the market has been too negative about the group's mortgage strategy.

Westpac's share price has underperformed peers over the past three to four months. But Macquarie said this was due to the market's concern that management would "lay waste" to its net interest margin in order to get back to system growth in mortgages.

Westpac's standard variable mortgage rates are the highest among the big banks, and over the past couple of years its mortgage market share has declined from about 26.5 per cent (based on Australian Prudential Regulation Authority figures) to 25.4 per cent.

Macquarie said the bank was not likely to cut is standard variable rate. "We believe that Westpac is likely to take a more measured approach, allowing a return to system growth to occur over time," the report said.

Examples of a more measured approach include increasing broker commissions and offering slightly higher discounts for new loans. These don't impact on profitability much, given that system growth is low.

According to Infochoice data, Westpac, St George Bank and Bank SA have all cut their package discount rates during the past month. The rate on Westpac's Premier Advantage package was cut by 30 basis points on June 24.

Westpac's loss of share in mortgages has been a popular topic with analysts this year. They believe the bank's chief executive, Gail Kelly, is under pressure to do something about it. Last month, Credit Suisse issued a report that said the bank had a poorly executed mortgage pricing strategy.

Macquarie said another bull point for Westpac was that its share price was likely to grow later in the year as the economy slows and "it becomes clear that Westpac is the best capitalised of the retail banks."