Why did Westpac shares crush the market in July?

Last month was a great one for shareholders of Australia's oldest bank.

| More on:
Happy woman holding white house model in hand and pointing to it with a pen.

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Westpac Banking Corp (ASX: WBC) shares were in great form in July.

During the month, the banking giant's shares rose an impressive 9.5% to end the period at a multi-year high of $29.80.

This was more than double the market return, with the S&P/ASX 200 Index (ASX: XJO) rising 4.2% over the month.

Why did Westpac shares outperform?

It is worth noting that it wasn't just Westpac that outperformed the ASX 200 index last month.

For example, Commonwealth Bank of Australia (ASX: CBA) shares rose 8% and National Australia Bank Ltd (ASX: NAB) shares climbed 6.5% in July.

This appears to have been driven by optimism over the health of the banking sector. Particularly given the belief that the US Federal Reserve will cut interest rates next month and the Reserve Bank of Australia (RBA) may not have to take rates higher again.

The latter would be good news for homeowners who can ill afford to see their mortgage repayments go even higher.

What else?

There was also a spot of good news for Westpac last month that could have given its shares an extra boost.

That news was the Australian Prudential Regulation Authority's (APRA) decision to reduce Westpac's total operational risk capital overlay from $1 billion to $500 million.

The bank notes that over the past four years, it has delivered a significant program of risk culture and risk management uplift through its Customer Outcomes and Risk Excellence (CORE) Program. This progress appears to have gone down well with APRA.

But Westpac isn't done there. It is currently in the transition phase to demonstrate the sustainability and effectiveness of changes made following the completion of the Integrated Plan in December 2023. If all goes to plan, it may not be too long until the remaining operational risk capital overlay is removed.

For now, the changes mean that Westpac's Common Equity Tier 1 (CET1) capital ratio will increase by approximately 18 basis points. This reflects a reduction in risk weighted assets of $6,250 million.

Commenting on the news, Westpac CEO Peter King said:

Westpac is now a simpler, stronger bank with substantially improved risk governance. We have moved into the transition period, which involves sustainably embedding the uplift in risk management practices.

What's next?

Unfortunately, almost all major brokers believe that Westpac shares are vastly overvalued.

For example, Citi, Goldman Sachs, and UBS all have sell ratings on its shares with price targets of $24.75, $24.10, and $25.00, respectively.

This implies potential downside of 16% to 19% over the next 12 months.

Citigroup is an advertising partner of The Ascent, a Motley Fool company. Motley Fool contributor James Mickleboro has positions in Westpac Banking Corporation. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended Goldman Sachs Group. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

More on Bank Shares

A young woman sits at her desk in deep contemplation with her hand to her chin while seriously considering information she is reading on her laptop.
Dividend Investing

Are CBA shares still a good buy today for passive income?

Looking to earn passive income from ASX dividend stocks? Here’s my take on CBA shares.

Read more »

Shocked office worker staring at computer screen with colleagues working in the background.
Bank Shares

The ASX bank share beating CBA in 2025

Many investors might not realise this smaller bank stock is leading the pack this year. 

Read more »

man thinking about whether to invest in bitcoin
Bank Shares

Here's what needs to happen for the CBA share price to try and reach $200

What could drive the CBA share price higher?

Read more »

A young woman sits at her desk in deep contemplation with her hand to her chin while seriously considering information she is reading on her laptop.
Bank Shares

Why now could be an opportune time to sell CBA shares

A leading expert offers his verdict on the outlook for CBA shares.

Read more »

A man holding a cup of coffee puts his thumb up and smiles while at laptop.
Bank Shares

The Westpac share price is a buy – UBS

The broker is optimistic on Westpac shares.

Read more »

Bank building with the word bank on it.
Bank Shares

The biggest buyers and sellers of ASX 200 bank stocks revealed

Macquarie breaks down who’s been buying and who’s been selling the ASX 200 bank stocks.

Read more »

A young woman sits with her hand to her chin staring off to the side thinking about her investments.
Resources Shares

Should I switch my ASX 200 banking stocks for ASX 200 miners before earnings season?

The ASX 200 Index is dominated by Australia's bank and materials/mining sectors, which together account for around half of the…

Read more »

A man sits in contemplation on his sofa looking at his phone as though he has just heard some serious or interesting news.
Bank Shares

Here's when Westpac says the RBA will now cut interest rates

The RBA surprised everyone by keeping rates on hold last week. So, when will the next cut happen?

Read more »