Why the Westpac Bank Share Price Dropped Today

What does WBC do?

Westpac Bank [ASX:WBC] is one of the Big Four banks, with operations across Australia and NZ. Its main business is consumer banking, which centres on home loans. It’s also involved in business banking, institutional banking and funds management via an interest in BT Funds Management.

What’s happening to Westpac’s share price?

Today, Westpac released its half-yearly results. The market didn’t like the numbers; as a result, the share price dropped around 5% at one point, to a low of $29.29.

That’s a very large one-day move for a bank.

What was the problem? On the surface things didn’t look too bad. Cash earnings rose 3%, while revenues increased 5%.

But the main indicator of profitability, return on equity (ROE), fell 166 basis points year-on-year, to 14.2%.

In my experience, ROE is the primary driver of stock prices. When ROE expands (for example, if it moves from 10% to 12%) the share price will rise. When the ROE falls (as it did in Westpac’s case) the share price will fall.

You can analyse all the moving pieces of the banks result, but it all condenses into the ROE. ROE simply measures how efficiently the company is using shareholders’ funds.

One thing that provides an artificial boost to ROE is debt, and Aussie banks are highly leveraged. The bank regulator, APRA, is attempting to address this high leverage by requiring the banks to hold higher levels of capital. Doing so has the effect of reducing ROE — and the share price in turn.

What now for WBC?

This isn’t a new development. The market has been pricing in a lower level of profitability for the banks for some time now. You can see this in the performance of WBC over the past year. The chart below shows the stock peaked a year ago, at $40 per share. It’s now trading just under $30.

Westpac Bank Greg

Source: BigCharts

The trend remains down, and a break below the recent lows around $28 suggests the fundamental backdrop is getting worse for Westpac.

There was a hint of this in the half-yearly result. For years, the powerhouse for the bank has been the consumer banking division, which is basically the home loan division. In the year to 31 March, 2016, cash earnings grew a very healthy 16%. But most of that growth came in the first half. Second-half growth slowed to just 5%.

Given the slowdown, and the ongoing downtrend in the share price, Westpac is a stock to avoid. A break below $28 will be a bearish development, suggesting the environment for banks is getting worse.

Never assess a stock’s fundamentals without looking at the chart too. Combining fundamental analysis with charting can yield powerful results.

If you’d like to know more, click here.

Greg Canavan

Editor, Markets and Money

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Greg Canavan is a Contributing Editor at Markets & Money and Head of Research at Port Phillip Publishing. He advocates a counter-intuitive investment philosophy based on the old adage that ‘ignorance is bliss’. Greg says that investing in the ‘Information Age’ means you now have all the information you need. But is it really useful? Much of it is noise, and serves to confuse rather than inform investors. And, through the process of confirmation bias, you tend to sift the information that you agree with. As a result, you reinforce your biases. This gives you the impression that you know what is going on. But really, you don’t know. No one does. The world is far too complex to understand. When you accept this, your newfound ignorance becomes a formidable investment weapon. That’s because you’re not a slave to your emotions and biases. Greg puts this philosophy into action as the Editor of Crisis & Opportunity. He sees opportunities in crises. To find the opportunities, he uses a process called the ‘Fusion Method’, which combines charting analysis with more conventional valuation analysis. Charting is important because it contains no opinions or emotions. Combine that with traditional stock analysis, and you have a robust stock selection strategy. With Greg’s help, you can implement a long-term wealth-building strategy into your financial planning, be better prepared for the financial challenges ahead, and stop making the same mistakes that most private investors do every time they buy a stock. To find out more about Greg’s investing style and his financial worldview, take out a free subscription to Markets & Money here. And to discover more about Greg’s ‘ignorance is bliss’ investment strategy and the Fusion Method of investing, take out a 30-day trial to his value investing service Crisis & Opportunity here. Official websites and financial e-letters Greg writes for:


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