We have been monitoring the income securities space (particularly banks) awaiting the Federal election and potential changes to negative gearing for the housing sector and the treatment of franking credits that could impact investor demand for bank hybrids like WBCPG given their high fully franked distribution yield.
Pleasingly, the election outcome has had a less than feared impact removing a level of risk around further steep declines in house prices. While a further material surprise has come from regulator APRA that will remove a loan serviceability floor (notably increases borrowing capacity) a move that will help support lending growth and bank profits at a time when official interest rate are falling. These moves are very supportive for the housing sector and major lenders like Westpac who are our second largest bank with a greater focus on mortgage lending. So given the current market expectations that official interest rates will fall further over the next year, we see the high 4.9% margin (above the 90 Day Bank Bill Swap rate) as very attractive for income investors. Based on current prices, WBCPG offers a running yield of 6% (includes Franking Credits) over the next 12 months