How Westpac (ASX:WBC) Measures Up on Valuation Amid ASX200 Banking Stocks Surge

Highlights

• WBC valuation models suggest potential for modest upside
• Two key valuation techniques: PE ratio and dividend model
• Dividend strength, sector PE average boost WBC’s profile

Westpac Banking Corporation (ASX:WBC) is trading around $33 per share, but investors often ask: what is the intrinsic value of this ASX200 stock? With banks forming a cornerstone of many income-focused portfolios, understanding valuation methods can be key to assessing opportunities in the financials sector.

Why Banks Are a Focal Point

Banking stocks have long drawn the interest of Australian investors thanks to their market dominance, consistent dividends, and pivotal role in the economy. Major players such as Westpac (ASX:WBC), National Australia Bank (ASX:NAB), and Bank of Queensland (ASX:BOQ) operate within a semi-concentrated market structure that supports their earnings consistency.

This dominance within the ASX200 today often leads analysts to focus on valuation ratios to determine relative performance and potential price targets.

Valuation Using Price-to-Earnings (PE) Ratio

One widely-used technique to estimate a company’s value is the PE ratio — calculated by dividing the share price by earnings per share (EPS). For Westpac, with FY24 earnings at $1.92 per share and a current share price of $32.81, the PE ratio stands at 17.1x. This is slightly below the banking sector average of around 19x.

Applying the sector average PE to WBC’s EPS implies a valuation of approximately $36.22. This sector-adjusted metric provides a benchmark view of where the share might trade, assuming market conditions remain stable.

Dividend Discount Model (DDM) Insights

For income-focused investors, the Dividend Discount Model offers another lens. Using WBC’s trailing dividend of $1.66 and a conservative forecast for growth, valuations range from $34.05 to $35.10 depending on risk assumptions. Taking it a step further by using grossed-up dividends (accounting for franking credits), the model arrives at a more optimistic valuation of $48.64.

Beyond the Numbers

Valuation models offer guidance but should not be seen as definitive answers. The complexities of modern banking — from loan book growth to shifting economic indicators — necessitate a broader lens. Investors may find value in understanding Westpac’s focus on interest income versus non-interest revenue and its strategic responses to economic trends such as employment data and property market health.

Current valuations hovering below some modelled targets, Westpac (WBC) stands as a notable presence among ASX200 banking stocks. While not all factors can be priced in through models alone, thoughtful analysis of both earnings and dividends provides a clearer view of its long-term positioning.