2018 was a disappointing year for Australia's 2nd largest bank, Westpac Banking Corp (ASX: WBC). The banking giant's share price fell 20.1% on the back of a cooling property market, rising funding costs and a myriad of scandals that were revealed during the Financial Services Royal Commission.
With the S&P/ASX 200 (Index: ^AXJO) (ASX:XJO) falling by 6.9% in 2018, shares in Westpac underperformed the market by 13.2% excluding dividends. The Westpac share price is also down 21% from its 52-week high of $31.74 in January 2018. Moreover, the sell-off in global equity markets over the last couple of months saw Westpac's share price fall to a low of $23.30, a price not seen since August 2012.
Fellow big banks Australia and New Zealand Banking Group (ASX: ANZ), Commonwealth Bank of Australia (ASX: CBA) and National Australia Bank Ltd (ASX: NAB) also underperformed the ASX 200 in 2018 with losses of 14.9%, 9.9% and 18.6% respectively.
Value territory?
The current consensus estimate for FY19 earnings per share stands at $2.37, which means Westpac is trading for less than 11 times forward earnings at current prices. This is a lower valuation multiple than what the bank has traditionally traded at for over the last several years in the post-GFC climate.
Investors should note that forward projections for the company's FY19 earnings have fallen by 5.5% over the last 12 months to reflect the increasingly challenging operating environment the bank is facing.
For income investors, shares in Westpac are trading at a dividend yield of 7.5% that comes attached with full franking credits. This would represent a grossed-up dividend yield of around 10.7%. A grossed-up yield of over 10% has traditionally been an attractive entry point for income focused investors in the banking sector, in particular for those with self-managed super funds.
Foolish takeaway
On a number of valuation metrics shares of Westpac appear to be historically undervalued. However, with the Australian property market still falling and yet to establish a bottom it might still be a bit premature to start buying up shares in the big banks.
Furthermore, with the Hayne Royal Commission report not due till February, a wait and see approach might be be the best course of action before buying shares in Westpac or in any of the other big banks.
