After several years in the wilderness, Westpac Banking Corp (ASX: WBC) has reminded investors what a well-run major bank can deliver. The share price surged through 2024 and 2025, dividends lifted, and total shareholder returns ranked second among the major banks last year.
As we head into 2026, though, I think the next chapter is far less straightforward. Westpac is entering the year with momentum, but also with a valuation that assumes a lot goes right. That is why I see 2026 as a potentially make-or-break year for the Westpac share price.
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A strong recovery story
There is no question Westpac's turnaround since the pandemic has been real.
At its 2025 annual general meeting (AGM), management highlighted its net profit of $7 billion and a return on tangible equity of 11% excluding notable items. Deposit growth outpaced loan growth, margins held steady despite competition, and the bank finished the year with a CET1 ratio of 12.5%, which is market leading in Australia.
Just as importantly, the long-running remediation and risk issues are now largely behind it. The completion of the CORE program and the removal of APRA's remaining $500 million capital overlay marked a symbolic and practical reset. I think Westpac is now operating from a position of strength rather than defence.
That shift could have been a key driver of the Westpac share price re-rating.
Why valuation now matters
The problem for 2026 is that Westpac is no longer priced like a recovery story.
After delivering a total shareholder return of over 20% in 2025, expectations are higher. In my view, at a 19x PE ratio, its shares are now valued more like a steady compounder than a bank still in the early stages of a turnaround. That leaves less margin for error.
Yet, its earnings growth looks set to be modest. Loan growth across the system is slowing, mortgage competition remains intense, and business lending is not immune to a softer economic backdrop. At the same time, costs are elevated. Expenses rose 9% in FY25, driven by investment in technology, bankers, and the UNITE transformation program.
Management has been clear that cost reductions are coming, but that is a medium-term ambition rather than a near-term certainty.
Execution is everything in 2026
At its AGM from last month, one word came up repeatedly: execution.
The new leadership team is focused on simplifying the bank, improving service, and driving productivity through UNITE and increased use of AI. These initiatives are sensible and necessary, but they also carry execution risk. Investors will want to see tangible progress, not just ambition.
Targets such as achieving a cost-to-income ratio below the peer average by FY29 are encouraging, but 2026 will be about proving that momentum is real and sustainable.
If costs do not start to moderate, or if revenue growth disappoints, the Westpac share price could quickly come under pressure.
What could still support the Westpac share price
That said, there are still reasons to be constructive.
Westpac's balance sheet is very strong, credit quality has been resilient, and capital flexibility supports attractive dividends. The final dividend of 77 cents in FY25 took full-year dividends to $1.53 per share, fully franked, which remains attractive for income-focused investors.
If interest rates remain supportive and the economy avoids a hard landing, Westpac could continue to deliver steady returns, even without strong growth.
My view on 2026
For me, 2026 really is a defining year for the Westpac share price.
If the bank can translate its strategic progress into lower costs and stable earnings growth, the share price can hold up and potentially grind higher. If not, the market may start to question whether much of the good news is already priced in.
