Westpac Banking has delivered a strong 81.8% share price gain over the past three years, yet the stock has pulled back over the past year and year to date. That mix of long run strength and recent weakness raises a simple question for investors who follow Westpac Banking: whether today's valuation is justified by the returns the bank earns on its capital.
- The 81.8% return over three years puts real weight on whether Westpac Banking's current returns on capital can support the share price that move has created.
- Business lending at Westpac is reported to be growing faster than home loans and may support higher net interest margins, which matters for how effectively the bank can turn its capital base into profits over time.
- If you'd rather focus on earnings, this one's for you. See what Westpac Banking's 16.4x P/E says about the price.
The issue now is whether the returns Westpac Banking earns on its capital are strong and durable enough to make the current share price look sensible.
If you want to test the same question about returns on capital across a wider field, scan the market using 5 high quality undervalued stocks.
Is Westpac Banking Fairly Priced on Excess Returns?
The Excess Returns model looks at how effectively Westpac Banking turns its equity base into earnings above the cost of that equity. On this measure the bank is assumed to earn stable EPS of A$2.19 on a book value of A$20.72 per share, with an average return on equity of 10.07%. The implied cost of equity is A$1.74 per share, so the excess return of A$0.45 per share suggests the business is expected to earn more on its capital than investors require, based on these inputs.
Those assumptions roll into a slightly higher stable book value of A$21.70 per share over time, pointing to a franchise that the model views as capable of sustaining positive returns on capital. Despite the clean up task in Westpac's business banking arm as it chases higher margin corporate lending, the Excess Returns workup still places the estimated intrinsic value broadly in line with the A$33.71 share price. Find out what Westpac Banking could be worth using our Excess Returns estimate.
The Westpac Banking Narrative: What Would Justify Today's Price?
Simply Wall St Narratives for Westpac Banking pick up where the valuation puzzle leaves off and explain which future paths in growth, margins and earnings would need to occur for the stock to be worth materially more or materially less than it is today on the market. Each scenario revolves around a set of clear assumptions rather than a single multiple or model output, so you can track those expectations against Westpac Banking's reported results over time.
Community views on Westpac Banking separate into one group that sees more upside in the story and another that is more restrained.
Bull case: 19% undervalued
"Loan growth across all customer segments, with Australian mortgages tracking slightly above system and business and institutional lending growing faster than mortgages…"
Discover why this Narrative puts Westpac Banking at 19% undervalued.
Bear case: roughly fairly valued
"Rising technology costs and investments in projects like UNITE have significantly increased operating expenses, which are expected to continue growing…"
Explore why this Narrative puts Westpac Banking at roughly fairly valued.
For Westpac Banking, the share price is only one piece of the decision
Before you decide how Westpac Banking fits into your portfolio, it is worth asking who is steering the bank and how their incentives line up with your outcomes. See who runs Westpac Banking and how they are paid.
This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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