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Here’s why Westpac Banking Corp shares might UNDERPERFORM the market

When compared to its peers, Westpac Banking Corp (ASX: WBC) doesn’t appear to offer investors much at all. For example, it controls less of the market than Commonwealth Bank of Australia (ASX: CBA) and pays a dividend of 5.3% versus National Australia Bank Ltd’s (ASX: NAB) 5.8%.

From my research, the number one reason investors buy Westpac can be put down to its high degree of safety. Not only is it cheaper than Commonwealth Bank using both a price-earnings and price-book ratio but it has the most conservative balance sheets.

Its coverage of bad and doubtful debts is second to none and its high level of asset quality allows it to have a low cost to income ratio, currently 41.20%. This compares to NAB’s cost to income ratio of 45.4% and Australia and New Zealand Banking Group’s (ASX: ANZ) 44.30%.

With an APRA Basel III common equity tier-1 capital ratio of 8.82% (10.5% internationally harmonised), Westpac remains most prepared for the regulator’s new capital requirements for domestic systemically-important banks, which take effect from 1 January 2016.

With superior balance sheets, in 2013 the bank was able to fund the acquisition of Lloyds Banking Group’s Australian assets for $1.45 billion. Westpac believes the acquisition will deliver around $100 million in additional cash earnings in FY15. However as Motley Fool Contributor Ryan Newman pointed out, the acquisition presented the acquirer with, “an opportunity to grow in an otherwise limited industry.”

The downside risk of mitigating risk

While Westpac has superior balance sheets and profitability, it is lacking any clear growth strategy which will enable it to grow earnings faster than its rivals and the S&P/ASX 200 Index (ASX: XJO) (^AXJO). Although Westpac has announced a push into wealth management, it represents only a small portion of group income. The only targeted area which seems to be growing with meaningful increases is Westpac’s Asian strategy, through its Institutional Bank division.

A great market beating investment  

In the most recent half year, Westpac’s cash earnings grew only 6% compared to the prior period, which was underwhelming compared to its peers. In my opinion, Westpac’s conservative balance sheets, high share price and lack of a significant growth strategy make it likely to underperform the market in both the short and medium terms.

As such I believe Westpac is not a buy. However, the good news is, if you’re looking for a top dividend stock with real growth potential there’s plenty on offer right now…

Where to invest $1,000 right now

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Scott just revealed what he believes are the five best ASX stocks for investors to buy right now. These stocks are trading at dirt-cheap prices and Scott thinks they are great buys right now.

*Returns as of February 15th 2021

Motley Fool Contributor Owen Raszkiewicz does not have a financial interest in any of the mentioned companies. 

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