Westpac’s (ASX.WBC) fiscal 2026 cash profit of $7 billion was flat on fiscal 2025. Loan growth of 5% and a 1% fall in operating expenses were offset by a 7-basis-point decline in net interest margins and loan impairment expenses doubling from cyclical lows.

Why it matters: Profit missed our forecast by 1%, mainly on NIM. Competition for home loans and deposits absorbed the benefit of higher cash rates, and with fourth-quarter loan applications down around 15% on last year, slowing credit growth likely keeps that competition intense.

  • Fiscal 2027 NIM should benefit from deposit and capital hedges, recent rate rises and the exit of lower-margin RAMS. But we expect competition to largely offsets these gains, leaving NIM broadly steady.
  • The cost/income ratio improved to 52% from 53%, with expenses excluding one-offs up just 1%. Westpac guides to similar cost growth in fiscal 2027, as productivity savings offset inflation and investment in its technology simplification program, Unite. We expect the ratio to fall toward 46% over five years as big project spend completes.

The bottom line: We retain our $30 fair value estimate for wide moat Westpac, with shares overvalued, trading at a 25% premium to our valuation.

  • On a forward P/E of 18 times and fully franked dividend yield of 4%, we don’t see a sufficient margin of safety given modest earnings growth and potential risks of higher credit stress, competition squeezing margins, or failure to execute on Unite.

Between the lines: Credit quality is sound, and Westpac remains well provisioned for a weaker economy. Loan impairment expense of $864 million, or 0.10% of average loans, was double fiscal 2025 and in line with our forecast, but still well below our medium-term expectation of 0.17%.

  • The final fully franked dividend of $0.77 was flat on the interim, in line with our forecast. The 75% second half payout is at the top of the 65%-75% target range, so we expect future dividend growth to track earnings.

Westpac loan and deposit growth picks up, but more efficiency improvement required

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 begun 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 is required to remain competitive, and has 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 that restrict negative gearing and reduce capital gains 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 businesses face higher interest costs, but our base case is that only a small percentage will default.

Bulls Say

  • A higher cash rate environment benefits customer deposit-funded banks by supporting margin expansion and higher returns 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 returns due to low loan growth, margin compression, subdued wealth and market income, and lower banking fee income.
  • AI increases deposit pricing competition by reducing customer inertia and making it easier to shift funds to higher-yielding accounts, raising funding costs and pressuring margins.
  • The bank’s failure to reset its cost base would leave it at a major disadvantage relative to peers in operating efficiency and return on equity.

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