After smashing the benchmark returns in 2024, Westpac Banking Corp (ASX: WBC) shares have run into some stiff headwinds in 2025.
In 2024, the S&P/ASX 200 Index (ASX: XJO) bank stock soared 41.1% to close out the year at $33.73 a share.
And that doesn't include the $1.66 in fully franked dividends eligible shareholders will have received over that time.
But with concerns mounting about valuations amid tough competition in the banking sector, Westpac shares have gone the other direction in 2025.
In afternoon trade today, shares are down 1.0%, changing hands for $29.78 apiece.
That sees the ASX 200 bank stock down 11.2% year to date, with no dividend payouts yet to help cushion those losses.
And according to Morgan Stanley, there's likely to be more selling to come.
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Why Westpac shares may have further to fall
According to Morgan Stanley analyst Richard Wiles, ASX 200 investors have eight reasons to be underweight Westpac shares (courtesy of The Australian Financial Review).
Among these, Wiles expects a higher execution risk in 2025 coupled with below system mortgage growth.
The broker also forecasts further margin pressures as well as potentially higher cost growth than guidance.
Wiles is also sceptical of the "unquantified and long-dated Unite benefits", which are intended to reduce Westpac's operational complexity.
With Westpac shares trading at a price-to-earnings (P/E) ratio of around 16 times, the Morgan Stanley analyst is also concerned about elevated multiples, along with less conviction on Westpac's capital management
Topping it off, Wiles cited the shift in investor sentiment and positioning we're already seeing in 2025.
Morgan Stanley downgraded its earnings per share estimates for the big four bank by 1.5% in FY 2025, 3.5% in FY 2026 and 3% in FY 2027.
The broker also lowered its price target for Westpac shares by 6.5% to $27.30, 8.3% below current levels.
What's the latest from the ASX 200 bank stock?
Westpac released its first quarter update, covering the three months to 31 December, on 17 February.
The bank's net interest income was down 6%, including notable items, while Westpac reported a 9% decline in unaudited net profit of $1.7 billion for the three months, also including notable items.
Core net interest margin (NIM) also declined 0.02% to 1.81% amid ongoing mortgage competition among Aussie banks.
Westpac CEO Anthony Miller pointed out that, "Excluding notable items, unaudited net profit increased 3% to $1.9 billion. Pre-provision profit grew 3% with revenue increasing 2% and expenses rising 1%."
Nonetheless, Westpac shares closed down 4.1% on the day the company reported.
