Westpac Share Price: Is ASX:WBC Undervalued or Overvalued?
As Westpac Banking Corporation's (ASX:WBC) margins shrink and bad debts creep higher, earnings growth will be challenging in the short term.
Mentioned: Westpac Banking Corp (WBC)
Key Morningstar Metrics for Westpac (ASX:WBC)
Data from Morningstar Direct as of 20 February 2024
What we think of Westpac’s Shares
Westpac Banking Corporation is Australia's oldest bank, marking 200 years in 2017. The high-profile multi-brand franchise in Australia and New Zealand is slanted toward retail banking, but retains meaningful exposure to the wealth, corporate, and institutional sectors. Margins improved as cash rates increased, but intense competition limited upside. Starved of material revenue growth opportunities, the bank will focus on cost-cutting initiatives. Recent results have been riddled with regulatory penalties, asset write-downs, and large loan loss provisions, but there are signs the worst is behind the bank. We assume notable items will not be as significant in the future.Â
Westpac Share Price (ASX: WBC)
Source: Morningstar Direct. Data as of 20 February 2024
Westpac Economic Moat Rating
We assign Westpac Banking Corporation a wide moat based on maintainable cost advantages and switching costs. Westpac is the second largest of the four major Australian banks, which combined control just under 75% of business and consumer lending, and a similar share of deposits. It’s virtually the same market structure in New Zealand, although Westpac is the third largest player there. Running a multi-brand strategy under Westpac, St George, Bank SA, and Bank of Melbourne, it has 13 million banking customers and is the number-one or -two player across mortgages, business loans, and cards. Despite regulatory changes lifting capital requirements, the bank’s large loan and deposit books continue to deliver robust net fee income, and with the increasing importance of scale to cope with changes in technology and regulation, Westpac should consistently earn returns above its 9% cost of equity through the cycle.
Bank moats are typically derived from two sources: cost advantages and switching costs. Cost advantage is an important source of the bank's wide economic moat, and supported by a low-cost deposit base, operating efficiency, and conservative underwriting relative to peers. The latter manifests in lower loan losses on average through the cycle. Given the commoditized nature of the industry, and competition for both loans and deposits, low costs is key to achieving excess returns.
Access our full research report to continue reading about Westpac’s (ASX:WBC) moat rating.
Westpac Risk and Uncertainty
Westpac is a major Australian bank, with operations spanning the consumer, business, and large corporate and institutional segments of the economy. It is exposed to changes in economic conditions and adverse movements in interest rates, inflation, unemployment, and exchange rates. Banks finance the economy, and changes in economic growth affect business activity, loan quality, and earnings growth. Regulatory changes increase the risk profile, with the potential to change capital requirements and lending standards. We believe taking all these factors into consideration makes a Morningstar Uncertainty Rating of Medium most appropriate.
A slow approval process can see mortgage brokers direct flow to other banks, evidenced by Westpac losing market share in recent years. At the same time, the bank must ensure appropriate risk management and lending standards or risk rising loan losses in the future, especially if house prices are falling.
