Westpac’s (ASX:WBC) third-quarter 2026 underlying profit of AUD 1.8 billion increased 2% on the first-half fiscal 2026 quarterly average. Loan growth of 2% and steady net interest margins supported top-line growth, while operating expenses and loan impairments increased by 1%. Shares slipped 5%.

Why it matters: We lower our fiscal 2026 forecast 2% to AUD 7.1 billion, with benefits to NIM from recent cash rate increases eroded faster than expected by competition in home lending and deposits. Slowing credit growth likely keeps rate competition high. Mortgage applications are 20% down on the second quarter, which likely will hit credit growth next year. Investor applications are down around 26%, but the 18% decline in owner-occupier reveals rate increases, and not only the budget tax changes, have slowed credit demand from strong levels. Softening house prices may also be deterring buyers, as fear of missing out turns into fear of overpaying. Population growth, high construction costs, and rising rents are expected to support prices in the medium term. We forecast fiscal 2027 home loan growth of just 2.5%, below Westpac’s 4.7% forecast, and a sharp pullback from 6.8% in fiscal 2026.

The bottom line: We retain our AUD 30 fair value estimate on wide-moat Westpac, with adjustments to short-term earnings not material enough to shift our valuation. Shares are overvalued, trading around 20% above our fair value. On a forward P/E above 17 times and a fully franked dividend yield of 4%, we don’t see enough of a margin of safety given modest earnings growth and potential risks of higher credit stress, competition squeezing margins, or failure to successfully execute its technology simplification. For the next five years, we estimate annual profit growth of 4%, on mid-single-digit loan growth, steady NIM, and operating cost savings. We assume loan impairment expenses/loans return to long-term averages around 0.17%, up from 0.1% in the quarter.

On a forward P/E above 17 times and a fully franked dividend yield of 4%, we don’t see enough of a margin of safety given modest earnings growth and potential risks of higher credit stress, competition squeezing margins, or failure to successfully execute its technology simplification.

For the next five years, we estimate annual profit growth of 4%, on mid-single-digit loan growth, steady NIM, and operating cost savings. We assume loan impairment expenses/loans return to long-term averages around 0.17%, up from 0.1% in the quarter.

Business strategy and outlook

Westpac Bank is the second-largest of Australia’s four major banks. The bank provides a range of banking and financial services to retail and business customers, including mortgages, consumer finance, credit cards, business loans, and term deposits. Most nonbanking units have been divested, including general, life, and mortgage insurance.

Westpac’s multibrand strategy owes to acquisitions, such as St. George Bank in 2008, to provide access to a broader customer base and add scale. Only recently has Westpac began colocating branches and building IT systems which allow any customer to be served in any branch. A focus on digital channels to improve the customer experience are required to remain competitive, and have the potential to lower the cost base.

The main current influences on earnings growth are modest credit growth and margin management as the cash rate rises. Pressure will be on banks to moderate how aggressively they discount new loans and offers on savings and term deposits. Tax changes which restrict negative gearing and reduce capital gain tax discounts are also expected to be a headwind for mortgage growth. Operating expenses should rise modestly as the bank resets its cost base after completing a number of remediation and technology projects. The bank has suffered from slow approval times in home lending, but increased resources and digital investments have improved service levels.

After enjoying super-low impairment charges pre-2020, we expect a return to midcycle levels around 0.17% in fiscal 2030. There is a risk of higher losses in the short term as households and business face higher interest costs, but our base case is that only a small percentage will default.

Bulls say

Despite recent cuts, the cash rate is still much higher than before covid, a better environment for customer deposit funding banks 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.

Bears say

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.

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