---
endpoint: analytics
pattern: Financial Services
status: done
latency_ms: 184597
conversation_id: 31a7df9e-61f0-461f-8af3-91b5d94d2bdb
citations: 14
created: 2026-05-31 21:04:16Z
---

# What is the investment thesis for Westpac in the current market environment?

# Westpac Banking Corp (WBC AU) — Investment Thesis

**Bottom Line — CLSA View (latest, 20 June 2025): Underperform, A$27.50 TP vs. A$33.21 spot (-17.2% downside) [6]**. The thesis is structurally cautious in the near term: WBC is the right strategic story (business-banking pivot, new CEO with credible cost-out agenda) but the wrong macro setup (RBA cutting cycle, replicating-portfolio disadvantage, elevated transformation costs) — leaving 12–18 months of EPS headwinds before Project UNITE benefits flow through in FY28–29.

---

## 1. The Macro & Sector Setup

Australia is in an easing cycle — two RBA rate cuts have already landed, and CLSA expects "more rate cuts likely adding pressure to bank earnings, buybacks slowing and the tail risk of rotation towards resources" [2]. Inside the Big Four, CLSA's preference order is **ANZ > NAB > Westpac > CBA**, with WBC carrying an explicit Underperform call [2]. The sector overall sits on Underweight — a relative call against a more defensive resources rotation.

Why this matters for WBC specifically: WBC carries a structural NIM disadvantage in this rate-cut cycle.

## 2. The Bear Case (CLSA's Primary Argument)

**a) Margin headwinds are uniquely sharp for WBC vs. peers** — In FY26 WBC has a *lack of replicating-portfolio benefits unlike peers given the shorter duration of the hedge which is a headwind* [2]. Translation: when rates fall, peer banks' rolling deposit hedges keep cushioning NIM longer than WBC's. CLSA cites this as a "material headwind relative to peers" in the company-specific thesis [1]. The May 2025 1H25 result already showed an exit margin down 1bp at 1.79%, with management guiding further compression [4].

**b) Cost growth re-accelerating to ~4% in 2H25** driven by amortisation, +A$70-110m of incremental investment spend, and the annualisation of salary increases — and Project UNITE will continue to "drag on costs in the next few years" with material benefits not flowing until FY28-29 [2][9]. CLSA models C/I rising from 50.3% in FY24 to 52.6% FY25CL and 53.9% FY26CL [8].

**c) Mortgage growth running below system** as RAMS continues to run down — limiting top-line offsets [2].

**d) Earnings actually declining** — CLSA forecasts net profit falling from A$7,113m (FY24A) to A$6,768m FY25CL (-4.8%) and A$6,484m FY26CL (-4.2%) before recovering modestly in FY27 [8]. ROE compresses from 9.8% → 8.9% → 9.0% over the forecast window [8].

**e) Valuation full given returns outlook** — CLSA applies a target P/B of 1.30x (vs. long-term avg 1.8x) and target P/E of 14.0x (vs. LT avg 12.7x) — i.e., even with below-trend P/B, the P/E premium reflects a stock that has already re-rated despite shrinking ROE [7]. CLSA frames the 5 May downgrade explicitly: *"We revise our recommendation from Hold to Underperform given anticipated earnings headwinds which include the impact of expected rate cuts"* [3].

## 3. The Defensive / Bull Counter-Case

WBC is not without offsetting positives — these are why the position is Underperform (-17% downside) rather than Sell:

- **CEO transition received well** — Anthony Miller has set credible targets: cost-to-income ratio less than peer average and greater-than-peer ROTE by September 2029, with 60-70% of the C/I improvement to come from cost-out. WBC's own 1Q26 update (Dec-25 quarter) shows the strategy is executing: ROTE of 11.6% (+69bps), pre-provision profit +7%, and management is pursuing *productivity savings of more than $500 million in FY26* [12].
- **Mix shift toward business banking is structurally positive** — CLSA acknowledges "WBC is shifting more towards business lending which is a positive" [1].
- **Capital position is robust** — CET1 of 12.3% at Dec-25, well above the 11.25% target [12]; CET1 was 12.24% at the 1H25 result with a A$1.1bn buyback remaining (extended to November), and CLSA expects RWA optimisation plus the eventual reversal of the A$500m APRA capital add-on and 23bp replicating-portfolio adjustment to release further capital [5].
- **Dividend looks safe** — CLSA expects the 76c dividend to be held flat at 152c p.a. through FY27, even running temporarily above the 65-75% payout target band in FY26 [5][8].
- **Upside risks**: NIM improvement via easing competition, credit growth strengthening, and loan losses continuing to track well below historical averages [10]. Asset quality is benign — impairment charges of just 6bps of average gross loans in 1Q26 [13].
- **Operating momentum at WBC's own quarterly cadence is positive** — 3Q25 (Jun-25) NPAT +8% to A$1.9bn with NIM up 5bp to 1.85% core [11]; 1Q26 NIM at 1.94% with the deposit hedge book extended by A$15bn to A$92bn for stability [11].

## 4. Synthesised Investment Thesis (Current Environment)

**The setup is a classic "good company, wrong window."** WBC has a credible CEO, a real cost-out program (UNITE), structurally defensive funding, and excess capital — but is heading into a cyclical NIM trough exacerbated by a peer-disadvantaged hedge book, with cost growth re-accelerating before the productivity benefits arrive. With the stock already at 16.4x FY25 EPS and 1.6x P/B for a 9.4% ROE [8], the risk/reward skews negative over a 12-month horizon — hence Underperform with -17% downside to A$27.50 [6][7].

**Tactically**: CLSA flags "short term positive 3Q25 margin tailwinds to watch for" around Bills/OIS, rate lag, and deposit pricing benefits [2] — and Westpac's own 3Q25 print delivered exactly that (NIM 1.99%, +8% NPAT) [11]. That window may be a trading bounce, not a thesis change.

**Strategically**: The buy case requires (i) faster-than-expected UNITE benefits, (ii) easing mortgage-market competition, or (iii) a rotation back into Big Four defensives if resources momentum stalls. None are CLSA's base case for FY26.

## 5. CLSA Big-4 Comp Table (priced 20 Jun 2025) [6]

| Bank | Rec | Spot (A$) | TP (A$) | Up/Down | FY25CL ROE |
|------|-----|-----------|---------|---------|------------|
| ANZ  | Outperform | 28.39 | 31.20 | +9.9% | 9.5% |
| NAB  | (not WBC-thesis ranked here) | 38.91 | 33.90 | -12.9% | 10.5% |
| WBC  | **Underperform** | **33.21** | **27.50** | **-17.2%** | 9.8% |
| CBA  | Underperform | 182.53 | 143.00 | -21.7% | 13.5% |

## 6. Catalysts to Watch [6]

- 3Q26 trading update (CLSA flagged August as next key WBC catalyst; one already delivered)
- Monthly APRA stats — mortgage market share trend
- RBA rate decisions — pace of further cuts vs. embedded base case
- UNITE program milestones — early productivity wins would re-rate the cost path

---

**Sources**

[1] Australian banks (ANZ the one to watch) — CLSA (20 Jun 2025) — 607962478LinqAlpha.PDF (Investment thesis - WBC)
[2] Australian banks (ANZ the one to watch) — CLSA (20 Jun 2025) — 607962478LinqAlpha.PDF (WBC: Underperform detailed view)
[3] Westpac - U-PF (Margin headwinds) — CLSA (5 May 2025) — 607957983LinqAlpha.PDF (1H25 result downgrade)
[4] Westpac - U-PF (Margin headwinds) — CLSA (5 May 2025) — 607957983LinqAlpha.PDF (Revenue challenges)
[5] Westpac - U-PF (Margin headwinds) — CLSA (5 May 2025) — 607957983LinqAlpha.PDF (Dividend & capital)
[6] Australian banks (ANZ the one to watch) — CLSA (20 Jun 2025) — 607962478LinqAlpha.PDF (WBC summary block; target price table)
[7] Australian banks (ANZ the one to watch) — CLSA (20 Jun 2025) — 607962478LinqAlpha.PDF (Valuation details)
[8] Westpac - U-PF (Margin headwinds) — CLSA (5 May 2025) — 607957983LinqAlpha.PDF (Financials at a glance)
[9] Westpac - U-PF (Margin headwinds) — CLSA (5 May 2025) — 607957983LinqAlpha.PDF (Cost growth)
[10] Australian banks (ANZ the one to watch) — CLSA (20 Jun 2025) — 607962478LinqAlpha.PDF (Investment risks - WBC)
[11] Westpac 3Q25 Update — Westpac Banking Corp (1 Jul 2025) — press release
[12] Westpac 1Q26 Update — Westpac Banking Corp (Dec 2025 quarter) — press release
[13] Westpac 1Q26 Update — Westpac Banking Corp (Dec 2025 quarter) — press release (NIM detail)
[14] Westpac 3Q25 Update — Westpac Banking Corp (Jun-25 quarter) — press release (CET1)

## Citations

- [1] **607962478LinqAlpha.PDF** · clsa — <s3://ext-linq-rms-clsa/2025/06/607962478LinqAlpha.PDF>
- [2] **607962478LinqAlpha.PDF** · clsa — <s3://ext-linq-rms-clsa/2025/06/607962478LinqAlpha.PDF>
- [3] **607957983LinqAlpha.PDF** · clsa — <s3://ext-linq-rms-clsa/2025/04/607957983LinqAlpha.PDF>
- [4] **607957983LinqAlpha.PDF** · clsa — <s3://ext-linq-rms-clsa/2025/04/607957983LinqAlpha.PDF>
- [5] **607957983LinqAlpha.PDF** · clsa — <s3://ext-linq-rms-clsa/2025/04/607957983LinqAlpha.PDF>
- [6] **607962478LinqAlpha.PDF** · clsa — <s3://ext-linq-rms-clsa/2025/06/607962478LinqAlpha.PDF>
- [7] **607962478LinqAlpha.PDF** · clsa — <s3://ext-linq-rms-clsa/2025/06/607962478LinqAlpha.PDF>
- [8] **607957983LinqAlpha.PDF** · clsa — <s3://ext-linq-rms-clsa/2025/04/607957983LinqAlpha.PDF>
- [9] **607957983LinqAlpha.PDF** · clsa — <s3://ext-linq-rms-clsa/2025/04/607957983LinqAlpha.PDF>
- [10] **607962478LinqAlpha.PDF** · clsa — <s3://ext-linq-rms-clsa/2025/06/607962478LinqAlpha.PDF>
- [11] **Westpac Banking Corporation, Q1 2026 Report** · external
- [12] **Westpac Banking Corporation, Q1 2026 Report** · external
- [13] **06mvhs9hchdr1r.pdf** · external
- [14] **06mvhs9hchdr1r.pdf** · external

