Sharesight is a portfolio tracker that is integrated into Morningstar Investor. Their data shows that over the course of 2023, Westpac (ASX: WBC) was the second largest buy trade and the second largest sell trade. Over the course of 2023, we have seen Westpac’s share price depreciate falling deeper into undervalued territory. Morningstar has it currently undervalued by 23% (at 27 November 2023).

Westpac’s share price over the course of 2023

Westpac share price history

When we invest it is based on our convictions on the future prospects of a company. When we sell it is because those convictions have been realised, or the prospects have changed. My colleague Mark LaMonica discussed reasons to sell in a recent article. 

At its very basis, the stock market is a marketplace. This means that on the other side of the trade there is an individual or a company that believes the opposite.

Over the course of 2023, many Morningstar Investor subscribers bought Westpac. In our perspective, it’s fair value of $28 means it is attractive from a valuation perspective. However, many investors also sold. Westpac has disappointed on many fronts in recent years.

Morningstar’s Banking Analyst Nathan Zaia says ‘I think Westpac shares are cheap. If you look at the PE of 11 and fully franked dividend yield above 6.5% it is more attractive compared to peers, so I can understand investors buying. On the other side of the fence, there are probably others which have grown impatient waiting for Westpac to deliver on cost savings which have proved much harder to achieve than expected, and probably require more investment spend too.’

Price vs Fair Value for Westpac

Historic Price to Fair Value for Westpac (ASX: WBC)

Adding to this is a bad taste in investors’ mouths given Westpac’s history.

The Royal Commission into Financial Services in 2018 publicly shamed the large banking and financial advice players in Australia. There have been specific costs to remediate customers, the exit of certain businesses, removal/reduction of some fees, as well as a step up in compliance and regulatory costs. While difficult to quantify, our analyst Nathan Zaia believes it’s likely the major banks' loan growth also suffered as a direct result. Not from brand damage, but as the first in the industry to adopt and implement APRA’s changes to responsible lending standards, the big four banks were temporarily at a disadvantage to smaller competitors.

They were also fined for charging deceased clients. Charging commissions that were banned. Charging fees without disclosure. Selling duplicate policies to customers.

More recently, Westpac was marred with reputational damage, as well as significant damage to the bottom line. They paid a $1.3 billion fine and lost a CEO over a violation of Anti-Money Laundering laws.

It is understandable that there are investors sitting on the other side of the fence.

Our Westpac research report gives a summary of the bull and bear cases for Westpac.

The Bull case

  • A higher cash rate environment gives customer deposit funding banks an opportunity to expand margins and drive higher return on equity.
  • Cost and capital advantages over regional banks and neo-banks provide a platform to win back market share.
  • Consumer banking provides earnings diversity to complement the more volatile returns generated from business and wholesale banking activities.

The Bear case

  • Slow core earnings growth resurfaces because of low loan growth, margin compression, subdued wealth and markets income, lower banking fee income.
  • Increasing pressure on stressed global credit markets could increase wholesale funding costs.
  • The bank failing to reset the cost base would leave it at a large disadvantage to peers when it comes to operating efficiency and ROE.

 

You’re able to find a Bull and Bear case summary for every equity in our coverage on Morningstar Investor.

This is a useful exercise to conduct whenever adding or removing an investment to your portfolio. Understanding the case for whoever is on the other side of the trade can help with your investing outcomes. Strengthening your conviction in your investment will increase your confidence in the prospects of the investment. This can help you deal with market noise, volatility and buyer’s remorse.

Reviewing the other side of the case may also bring doubt. It may be worth assessing the basis for your investment and whether it is impulsive. Or, it may expose you to perspectives about the future prospects of the company that you may not have considered.