Should you buy Westpac?

At today’s price, how attractive is this bank?

Since the financial crisis, the global economy has been dominated by policies set by central banks and record-low interest rates, as opposed to being driven by economic growth and strong company earnings.

With Australia’s own cash rate currently sitting at 2.5%, investors have sought out high-yielding, defensive dividend plays to make up for low interest returns on term deposits, which has driven the market up substantially.

Westpac (ASX: WBC) and its primary competitors NAB (ASX: NAB), Commonwealth Bank (ASX: CBA) and ANZ (ASX: ANZ) have perhaps been the greatest beneficiaries of this trend. Since mid-2012, the stocks have increased in value by (respectively) 55%, 46%, 48% and 42%.

However, even while the banks are very expensive (based on their potential to deliver market beating-returns in the long run), the stocks still appeal to many investors due to their safety and defensive natures. For those investors still willing to purchase bank stocks, Westpac may not be the best option.

First and foremost, the bank currently doesn’t offer the same element of growth that others like ANZ do. ANZ is heavily focused on expanding into the Asian market, making it, arguably, the bank with the greatest growth potential.

On the other hand, whilst Westpac maintains the highest mortgage rate of any of the big four, its market share has in fact diminished over the last 12 months, with many analysts concerned that this market share could fall further. Even following a 0.28 percentage point cut after the RBA dropped the cash rate in early August, the interest rate it offers is still significantly higher than its competitors.

Furthermore, Commonwealth Bank and NAB have both heavily invested in technology to hold off threats such as Apple (NASDAQ: AAPL) and Google (NASDAQ: GOOG), which are both pushing into the mobile banking market. Westpac has a lot of catching up to do in this regard, after admitting that it is significantly behind its rivals in terms of the technology it offers.

Foolish takeaway

For investors looking to achieve market-beating returns in the medium term, it may be wise to look beyond the banks at the heavy end of the ASX and instead look towards smaller companies that offer significant growth potential.

For instance, two of Australia’s most promising small companies are still flying under the radar. Discover these two exciting ASX investments in our brand-new special FREE report, “2 Small Cap Superstars”. Click here now, it’s free!

Motley Fool contributor Ryan Newman does not own shares in any of the companies mentioned in this article.

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