Join +750K new investors every month who copy stock picks from billionaire's portfoliosSign Up Free

Westpac Shares Drop After Goldman Sachs Issues Sell Rating

Published 24/05/2024, 08:43 pm
© Reuters.  Westpac Shares Drop After Goldman Sachs Issues Sell Rating
GS
-
WBC
-

Westpac Banking Corp (ASX: ASX:WBC) shares experienced a notable decline on Thursday, ending the day nearly 1% lower at AU$26.87. This drop follows a downgrade from analysts at Goldman Sachs (NYSE:GS), who have raised concerns about the current valuation of Australian banks.

Reasons Behind the Decline

The key driver behind the sell-off was a critical note from Goldman Sachs, which suggests that bank valuations are currently "at extremes." The broker's review highlights several metrics that underpin this assessment:

  • Valuation Extremes: Goldman Sachs pointed out that Australian bank valuations are at their highest levels, with 12-month forward Price-to-Earnings Ratios (PERs) reaching the 99th percentile. The broker's discounted cash flow (DCF) valuations are, on average, 175% below current share prices.
  • Yield Spread Concerns: The spread between fully-franked yields of banks and the 10-year bond yield is at its lowest in nearly 15 years, further indicating potential overvaluation.

Comparative Valuation Analysis

While Goldman Sachs acknowledges that, compared to industrials, banks may not seem overly expensive, they caution against relying solely on this metric. The note elaborates:

  • PER Comparison with Non-Bank Industrials: Although banks have re-rated significantly over the past year and continue to trade nearly 5% below their long-term historical averages against non-bank industrials, this approach might be simplistic.
  • Fundamental Evolution: The broker stresses that relative fundamentals between banks and non-bank industrials have evolved. Despite the recent reporting season indicating a slowdown in the pace of deterioration in bank fundamentals, a significant improvement is not anticipated.

Limited Upside Potential

Goldman Sachs concludes that the deterioration in bank earnings may have stabilised, but there is limited upside potential from current levels. The broker's analysis indicates that the risks are skewed to the downside, making a negative view on the banks more appropriate at this juncture.

Downgrade and Price Target (NYSE:TGT)

Given these concerns, Goldman Sachs has downgraded Westpac shares from a neutral to a sell rating, maintaining a price target of $24.10. This represents a potential downside of over 10% from the current share price of $26.87, indicating that investors might face further losses over the next 12 months.

Implications for Investors

The downgrade by Goldman Sachs sends a strong signal to investors about the potential overvaluation in the banking sector, particularly for Westpac. With the broker highlighting limited improvement in fundamentals and asymmetric downside risks, the recommendation to sell reflects a cautious stance on the bank's future performance.

Read more on Kalkine Media

Latest comments

Risk Disclosure: Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.
© 2007-2024 - Fusion Media Limited. All Rights Reserved.