Westpac expensive compared to other banks

Although Westpac  (ASX: WBC) may be the best-positioned bank to deal with tougher regulatory requirements, it is not necessarily the best investment option out of the big four at today’s prices.

Under new rules to be implemented by the Australian Prudential Regulation Authority (APRA), the nation’s biggest banks — Westpac, NAB (ASX: NAB), ANZ (ASX: ANZ), Commonwealth Bank (ASX: CBA) and Macquarie Group (ASX: MQG) – will be required to maintain a greater amount of capital in case of a major economic downturn.

Aside from showing cash earnings of $7.1 billion in last week’s annual profit report, Westpac’s results also showed that it maintains the lowest level of bad debts amongst the banks as well as the greatest amount of capital. This was highlighted by the bank’s ability to acquire Lloyds Banking Group’s Australian assets for $1.45 billion without having to raise further capital.

However, although it might be better positioned than its rivals, the company’s shares are up more than 30% for this calendar year and are trading at 2.29 times the price of its book assets as well as a P/E ratio of 15.3.

According to analysts at UBS, the key driver of share price for the major banks (other than dividend yields) is consistent growth in revenue per share. Westpac may have experienced consistent growth in this area, but its rate of growth has been much slower than that of Commonwealth Bank.

As such, Westpac’s CEO Gail Kelly stated that the bank would be “tilting a bit more to growth as we go into the 2014 year.” This would include factors such as growth in mortgages as well as improving cross-selling of various products, including wealth management and insurance.

Foolish takeaway

Whilst it might sound like a simple task, each of Westpac’s competitors will be striving for similar goals given the slow credit growth environment. What may drive Westpac’s share price upwards is its ability to maintain higher dividends (due to its better capital position), but otherwise it may struggle compared to the other banks.

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

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