Westpac Banking Corp (ASX: WBC) shares have had a strong run, and the bank has just released its FY 2026 full-year results.
So, with its shares trading at $36.64 on Wednesday, would I be interested in buying? Let's take a look.
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A challenging outlook for Westpac
While Westpac is a quality company, I have concerns over the increasingly difficult environment facing Australia's banks.
The Reserve Bank of Australia (RBA) raised interest rates again this week, taking the cash rate to 4.85%.
While higher rates can benefit banks in some respects, they also put additional pressure on mortgage holders and could weigh on lending growth.
Australia's housing market is already weakening, and I suspect further pressure on household finances could make conditions increasingly challenging for lenders.
Westpac's recently released FY 2026 results provide some evidence of these pressures. The bank reported net profit of $7 billion excluding notable items, which was unchanged from the previous year.
Its net interest margin also declined by seven basis points to 1.87%, while credit impairment charges more than doubled to $864 million.
Although Westpac continues to grow its lending book, I don't think these figures suggest that a significant earnings acceleration is around the corner.
And that brings me to my biggest concern.
Are Westpac shares too expensive?
At $36.64, Westpac shares are trading on a forward PE ratio of 17x forecast FY 2027 earnings, based on the consensus earnings per share estimate of $2.15.
I think that's a demanding valuation for a bank facing a difficult operating environment.
For some perspective, I estimate that Westpac has traded on a median annual PE ratio of approximately 13.8 times over the past decade.
Looking at just the past five years, I estimate the median to be even lower at approximately 13.2 times.
While these historical multiples aren't directly comparable with a forward P/E ratio, they suggest that investors are paying a substantial premium to what has typically been expected for Westpac shares.
And I'm struggling to see what justifies that premium when earnings growth is under pressure.
I'm not alone in avoiding Westpac shares
Analysts at Morgans are also cautious following the bank's full-year results.
The broker highlighted that Westpac's second-half earnings per share and dividends were flat compared with the first half and below expectations.
It has subsequently reduced its FY 2027 earnings forecasts by approximately 5%. Morgans also questions whether Westpac can achieve its FY 2029 financial targets without significantly outperforming its expectations.
The broker has a $32.32 price target on Westpac shares, which implies approximately 12% downside from current levels. Including expected dividends, Morgans estimates a negative total shareholder return of approximately 9%.
I think that's a concerning outlook, especially when there are plenty of other ASX shares offering stronger earnings growth potential.
Westpac is still a profitable business with a strong market position. But I don't want to pay a premium valuation for a bank whose earnings are struggling to grow.
For that reason, I wouldn't be buying Westpac shares at current prices.
