Last Update 29 Oct 25
Fair value Increased 0.70%Westpac Banking's analyst price target has increased modestly from $32.00 to $32.23. Analysts cite improving profit margins and an upgraded rating from Neutral to Sell as key drivers for the upward revision.
Analyst Commentary
Recent Street research on Westpac Banking reveals diverging perspectives on the company’s valuation and outlook. Analysts continue to scrutinize the bank’s performance, with shifts in ratings and price targets reflecting changes in sentiment.
Bullish Takeaways- Bullish analysts note that upgraded recommendations reflect progress in fundamental business improvements, supporting a modest increase in the price target.
- Raising the price target indicates growing confidence in Westpac Banking’s ability to enhance profit margins and drive operational efficiencies.
- Recent upgrades to a Neutral rating suggest improving prospects for sustainable earnings growth in the near term.
- Improving capital positions and robust asset quality contribute to an overall positive outlook, bolstering valuation support.
- Despite the price target increase, not all analysts are optimistic, with some seeing ongoing challenges that may limit near-term upside.
- Concerns persist regarding the pace and consistency of margin expansion, leaving Westpac exposed to competitive pressures.
- Valuation remains a concern for some as shares approach elevated levels relative to historical averages, potentially capping capital appreciation.
What's in the News
- Westpac Banking has proposed an amendment to its Constitution at the upcoming 2025 Annual General Meeting. This amendment would allow shareholders to pass advisory resolutions on material risks, provided such resolutions do not violate laws or relate to personal claims. (Key Developments)
Valuation Changes
- The Fair Value Estimate has risen slightly from A$32.00 to A$32.23, reflecting a modest increase in projected intrinsic value.
- The Discount Rate edged higher, moving from 7.78% to 7.79%, indicating a marginally increased risk premium or required return.
- The Revenue Growth projection dipped marginally from 4.55% to 4.54%, signaling a small adjustment to expected top-line growth.
- The Net Profit Margin improved from 27.69% to 28.19%, suggesting enhanced operational efficiency and profitability expectations.
- The Future P/E ratio decreased slightly from 19.68x to 19.48x, pointing to a modestly lower valuation multiple anticipated for forward earnings.
Key Takeaways
- Intense competition and changed deposit mix are compressing net interest margins, challenging revenue growth.
- Rising tech costs and projects like UNITE increase expenses, negatively impacting short-term earnings.
- Westpac's robust financials and strategic tech investments suggest sustained revenue growth and enhanced profit margins amid stable credit quality and customer service focus.
Catalysts
About Westpac Banking- Provides banking and other financial services in Australia, New Zealand, the Pacific Islands, Asia, the Americas, and Europe.
- Intense competition in the consumer banking segment, particularly in mortgages, is putting pressure on net interest margins, which is expected to compress net margins further in the future.
- Rising technology costs and investments in projects like UNITE have significantly increased operating expenses, which are expected to continue growing. This could negatively impact net margins as cost growth may outpace revenue growth.
- The UNITE program, intended to simplify systems and improve processes, requires significant investment without immediate returns, potentially affecting earnings in the short to medium term.
- The transition from call to term deposits in response to rising interest rates has changed the deposit mix, which might be less favorable for net interest margins and could influence revenue outcomes negatively.
- With predictions of a sluggish economic recovery and subdued consumer spending, revenue growth may remain constrained, affecting overall earnings potential.
Westpac Banking Future Earnings and Revenue Growth
Assumptions
How have these above catalysts been quantified?- Analysts are assuming Westpac Banking's revenue will grow by 4.5% annually over the next 3 years.
- Analysts assume that profit margins will shrink from 32.6% today to 27.7% in 3 years time.
- Analysts expect earnings to reach A$6.8 billion (and earnings per share of A$1.96) by about September 2028, down from A$7.1 billion today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as A$7.7 billion.
- In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 18.8x on those 2028 earnings, up from 18.0x today. This future PE is greater than the current PE for the NZ Banks industry at 14.6x.
- Analysts expect the number of shares outstanding to decline by 0.49% per year for the next 3 years.
- To value all of this in today's terms, we will use a discount rate of 7.73%, as per the Simply Wall St company report.
Westpac Banking Future Earnings Per Share Growth
Risks
What could happen that would invalidate this narrative?- Westpac's strong financial performance, with a statutory net profit and disciplined margin management, suggests stability that can support revenue and earnings growth.
- The bank's robust balance sheet, including a high CET1 ratio, provides a cushion for potential external shocks, which could maintain steady earnings.
- Strategic investments in technology and initiatives like UNITE are expected to improve efficiency and could enhance profit margins over time.
- Improving customer service and innovation in areas like merchant services and digital banking can drive revenue growth across various segments.
- Successful management of credit quality and low impairment charges demonstrate resilience, which may sustain net margins and overall financial health.
Valuation
How have all the factors above been brought together to estimate a fair value?- The analysts have a consensus price target of A$30.545 for Westpac Banking based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of A$38.0, and the most bearish reporting a price target of just A$27.5.
- In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be A$24.7 billion, earnings will come to A$6.8 billion, and it would be trading on a PE ratio of 18.8x, assuming you use a discount rate of 7.7%.
- Given the current share price of A$37.16, the analyst price target of A$30.54 is 21.7% lower.
- We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.
How well do narratives help inform your perspective?
Disclaimer
AnalystConsensusTarget is a tool utilizing a Large Language Model (LLM) that ingests data on consensus price targets, forecasted revenue and earnings figures, as well as the transcripts of earnings calls to produce qualitative analysis. The narratives produced by AnalystConsensusTarget are general in nature and are based solely on analyst data and publicly-available material published by the respective companies. These scenarios are not indicative of the company's future performance and are exploratory in nature. Simply Wall St has no position in the company(s) mentioned. Simply Wall St may provide the securities issuer or related entities with website advertising services for a fee, on an arm's length basis. These relationships have no impact on the way we conduct our business, the content we host, or how our content is served to users. The price targets and estimates used are consensus data, and do not constitute a recommendation to buy or sell any stock, and they do not take account of your objectives, or your financial situation. Note that AnalystConsensusTarget's analysis may not factor in the latest price-sensitive company announcements or qualitative material.