The Westpac Banking Corp (ASX: WBC) share price has been a strong performer over the last six months.
During this time, Australia's oldest bank's shares have risen over 21%.
In addition, Westpac rewarded its shareholders with a fully franked 72 cents per share final dividend in December and later this month will pay a 90 cents per share interim dividend.
But are the good times over for the time being and is the Westpac share price starting to look fully valued? Let's find out.
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Is the Westpac share price fully valued?
Unfortunately, the general consensus is that Westpac's valuation is now becoming stretched.
For example, even Morgans, which has a hold rating on its shares, has a price target of $24.15. That is 7% below where the bank trades today.
Elsewhere, analysts at Citi recently put a sell rating and $24.75 price target on its shares, and Morgan Stanley put an underperform rating and $24.50 price target on them.
Rally over
Last month, Goldman Sachs called time on the Westpac share price rally largely on valuation grounds.
It believes that the bank valuations are now skewed heavily to the downside. It said:
With earnings risks more balanced, valuations skewed heavily to the downside, and our analysis suggesting previous sector deratings not being catalysed by absolute or relative earnings downgrades, we take a more negative view on the banks, reflected by downgrading: 1) WBC to Sell from Neutral, given i) execution, cost and timing risks relating to its technology simplification, ii) of the major banks, WBC's balance sheet is the most overweight domestic housing, which we expect will be more growth constrained than commercial lending over the medium term, iii) NIM has been supported by a shorter duration replicating portfolio but this will give them less longevity, and d) WBC's 14.2x 12-mo fwd PER is more than one standard deviation expensive vs. its 12.7x historic average.
Goldman has a sell rating and $24.10 price target on the bank's shares. Based on the current Westpac share price of $25.98, this implies potential downside of 7.2% over the next 12 months.
Though, with Goldman forecasting dividends of $1.50 per share to be paid out over the next 12 months, which equates to a 5.8% dividend yield, the total potential loss on investment is a more modest 1.4%.
The broker concludes:
Valuations full: WBC's 12-mo fwd PER of 14.2x is more than one standard deviation expensive vs. its 15-yr historic avg of 12.7x (Exhibit 11). While its relative PER vs. its peers has fallen to a 20% discount, vs. its 15-yr avg of a 5% discount, this largely correlates with the relative deterioration in its ROTE vs. peers.
