Westpac’s (ASX: WBC) third-quarter 2025 underlying profit of AUD 1.9 billion increased 8% on the first half of fiscal 2025 quarterly average. Net interest margins increased to 1.99% from 1.92%, and on 2% loan growth, ensured revenue easily outpaced 3% expenses growth.

Why it matters: We increase our fiscal 2025 forecast 4% to AUD 7.4 billion, thanks to a quicker rebound in NIM and small loan impairment expenses. Part of the NIM uplift is a welcome benefit from loan and deposit pricing, needed to improve recent softness in industry returns.

  • For the next five years, we estimate annual profit growth of 4.5%. per year, 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 just 0.05% in the quarter.
  • Underlying operating trends are positive. Revenue growth is driven by annualized loan growth of 8%, and price competition appears to have eased. Operating expenses are up on planned investment spending to simplify the bank, with future benefits expected. Credit quality is sound.

The bottom line: We retain our AUD 29 fair value estimate on wide-moat Westpac, with adjustments to short-term earnings not material enough to move the dial. Shares are overvalued, trading at a 17% premium to our fair value.

  • On a forward P/E above 16.5 times and a fully franked dividend yield of 4.7%, 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.
  • Westpac bringing its cost/income ratio down from 50% to our forecast of 46% by fiscal 2029 is crucial to our thesis. Efficiency should improve as the bank reduces headcount and the benefits of technology investment are realized.

Between the lines: Common equity Tier 1 ratio of 12.3% exceeds regulatory requirements, leaving the bank well-positioned to invest and steadily increase dividends.

Westpac loan 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 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 margin management as the cash rate begins to fall. Pressure will be on banks to moderate how aggressively they discount new loans and offers on savings and term deposits. 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 2029. There is a risk of higher losses in the short term as households and business face a material increase in interest costs, but our base case is that only a small percentage will default.

Westpac 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.

Westpac 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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Terms used in this article

Fair Value: Morningstar’s Fair Value estimate results from a detailed projection of a company’s future cash flows, resulting from our analysts’ independent primary research. Price To Fair Value measures the current market price against estimated Fair Value. If a company’s stock trades at $100 and our analysts believe it is worth $200, the price to fair value ratio would be 0.5. A Price to Fair Value over 1 suggests the share is overvalued.

Moat Rating: An economic moat is a structural feature that allows a firm to sustain excess profits over a long period. Companies with a narrow moat are those we believe are more likely than not to sustain excess returns for at least a decade. For wide-moat companies, we have high confidence that excess returns will persist for 10 years and are likely to persist at least 20 years. To learn about finding different sources of moat, read this article by Mark LaMonica.