Westpac Banking Corporation: an analysis of its share price

The context:

Westpac shares have tumbled in recent weeks, as investors weigh the potential consequences of the allegations by AUSTRAC that the bank violated AML/CTF laws some 23-million times. Adding to an already challenging business environment, due to continued fall-outs from the Hayne Royal Commission, and a falling interest rate environment, Westpac shares have shed nearly 10% since the end of November when the AML breaches were reported, and almost 20 per cent from its yearly highs in December. The bear’s claws have clearly been out for Westpac in recent months. But with the bank’s shares having fallen as far as they have, they question naturally arises: when do Westpac shares start looking like a buy?

Westpac shares: fundamental analysis

Fundamental indicators suggest that Westpac might currently be a little undervalued, implying that, at its current price of around $24.00, the bank’s stock presents an attractive buying opportunity. According to data compiled by Bloomberg, the bank’s stock possesses, still, a 62.5% hold rating amongst brokers, to go with a consensus price target of $26.08. Now a caveat: these figures are currently subject to a high risk of downward revision, as Westpac shares remain in a general downgrading cycle amongst brokers. Nevertheless, when marked against historical averages, Westpac stock is going cheap. A price-to-earnings ratio of 12.5 is below the 10-year average of 13.05, and at 7.5%, its next dividend yield is relatively juicy.

Westpac shares: technical analysis

The technicals suggest Westpac shares are oversold currently, but that momentum remains to the downside. The Daily RSI is delivering an oversold signal, flashing a roughly 21 reading by that measure right now. But momentum is deeply skewed to the downside, with the MACD delivering a negative reading, and a crossover in the 50-day and 200-day EMA signalling an ominous “death-cross”. The price-action is undoubtedly bearish. But there are some saving emerging, supportive signs for Westpac shares. Price has seemed to have found some level of support around the $24 mark. While compared to an index of bank shares, Westpac shares are trading at a considerable discount, likely reflecting a greater, but temporary risk-premium in the price.

Market set-up:

Investors will undoubtedly be keen to pick-up Westpac shares at a bargain; but the issue is a matter of timing. The actual penalties associated with Westpac’s breaches of AML laws are yet to be quantified, and therefore confidently priced-in to the market. Hence, until the cost of these penalties are known, a risk-premium may well remain in the bank’s share price. However, once the costs do come to light, and become discounted, market fundamentals suggest Westpac shares are currently cheap, and could be a bargain “buy”. A turn higher in the RSI out of oversold levels, and a swing in the MACD to the upside, could confirm the market has turned bearish to relatively bullish on Westpac shares.