Westpac Banking Corp (ASX: WBC) shares are underperforming the rest of the big four banks on Thursday.
At the time of writing, Australia's oldest bank's shares are down a fraction to $21.38, whereas the rest of the big four are all in positive territory.
Why are Westpac shares underperforming?
Investors have been selling Westpac shares today after the bank lost one of its biggest bulls in the broker community.
For some time, the team at Goldman Sachs has rated Westpac as the best big four bank to buy. So much so, the broker had the bank on its coveted conviction list.
But all that changed today, with Goldman switching its allegiance to rival ANZ Group Holdings Ltd (ASX: ANZ).
This has seen Westpac dumped off the list and downgraded to a hold rating with a trimmed price target of $23.39 (from $24.67).
Based on the current Westpac share price, this implies a potential upside of 9.5% for investors. And while this is reasonably good upside potential, the broker sees more value elsewhere in the sector.
Why the downgrade?
Inflation is largely to blame for the downgrade. Goldman fears that sticky inflation is going to weigh on the bank's costs. In fact, after recently abandoning its major cost reduction target, the broker fears that even flat costs may be out of reach now for Westpac. It explains:
In 1H23, WBC was able to offset c.5% core expense growth with productivity benefits, resulting in a 1% hoh reduction in costs. However, recent feedback on ongoing IT and staff cost pressures, coupled with incremental productivity benefits likely getting harder as WBC gets further into its reset program, sees us now expecting some cost growth in FY24E (previously broadly flat).
Another worry the broker has is the bank's skew to consumer lending. It adds:
WBC's relative skew towards consumer lending leaves it more exposed to the macro environment that we foresee, where we forecast housing lending growth to trough at a c.50-year low of just 1% in Mar-24, versus the 4.5% trough for business lending.
Goldman is expecting this to weigh on the bank's net interest margins (NIM) more so than peers. It explains:
WBC noted core NIM (i.e. NIM ex notables and markets) peaked in Oct-22 and exited 2 bp below the 1H23 average. While there are some early signs that mortgage competition is easing, the front- vs. back-book spread remains a NIM headwind, and deposit betas continue to rise as we get deeper into the cash rate hiking cycle, which will also adversely impact deposit mix. Net-net, WBC's relative skew towards consumer likely positions the bank for NIM headwinds relative to peers.
Food for thought for investors looking for banking sector exposure.
