Westpac (ASX: WBC) Beats Earnings, But Shares Drop: Is the Rally Over?

Westpac Banking Corporation (ASX: WBC) reported full-year earnings this morning, beating analyst expectations with a $6.9 billion profit. Despite the solid result, shares dropped 1.5% to $38.12 as investors questioned whether the bank’s 22% rally over the past year has run its course. With a 5% dividend yield and new leadership driving transformation, is Westpac still a buy at $38.75?

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The Turnaround Behind the 22% Rally

Westpac has climbed 22% over the past year as investors bought into the bank’s transformation story. After years of regulatory troubles, CEO Anthony Miller brought fresh leadership and launched Project Unite, a major IT overhaul designed to cut costs and improve efficiency.
The Australian Prudential Regulation Authority (APRA) recently removed its enforceable undertaking and extra capital requirements, signalling Westpac’s compliance issues are finally behind it. This combination of new leadership and regulatory relief gave investors confidence that the bank could close the gap with the Commonwealth Bank of Australia (ASX: CBA) and National Australia Bank (ASX: NAB).

FY2025 Results: What You Need to Know

Westpac Banking Corporation (ASX: WBC):

Westpac reported a net profit of $6.9 billion for the year ended September 30, 2025, down 1% from last year but beating the $6.92 billion consensus estimate.

● Net interest income rose 3% to $19.5 billion, with total loans up 6%
● Customer deposits grew 7% to $723 billion
● Business lending surged 15%, institutional lending jumped 17%
● Net interest margin slipped 1 basis point to 1.94% due to mortgage competition

The bank lifted its fully franked dividend to 153 cents per share, up 1% from FY2024. The final dividend of 77 cents per share will be paid on December 19.

Strong Growth in Business Banking

The standout was business and institutional lending, areas with higher margins and less competition than home loans. Business lending grew 15%, with agribusiness up 22%. This shift towards commercial banking shows Westpac moving away from the brutal mortgage market, where margins are getting squeezed.
However, the 1 basis point margin decline reflects the pressure all Australian banks face. With the RBA expected to cut rates, margins could compress further even as loan volumes grow.

What Analysts Are Saying

Going into earnings, analysts expected around $6.92 billion in profit with modest growth ahead. The result met expectations, but the stock’s 1.5% drop shows investors wanted more.
Goldman Sachs initiated coverage in October with a Neutral rating and $37.63 price target, noting the stock is now “fairly valued” after its 22% run. The broker expects only modest earnings growth due to rate cuts and competition.
UBS is more optimistic with a Buy rating and $37.00 target, forecasting dividend yields just below 5%. However, Morgans and Ord Minnett have sell ratings with $30-31 targets, implying 20% downside from current levels. The consensus 12-month price target sits around $32.98, suggesting most brokers see limited upside.

Key Risks to Watch

● Valuation stretched: At $38.75, Westpac trades well above the average broker target of $33. The easy gains may be done.

● Margin pressure: If the RBA cuts rates aggressively, Westpac’s 1.94% net interest margin could compress further, hurting profits and potentially forcing dividend cuts.

● Transformation costs: Project Unite is driving up expenses. Management needs to prove these costs are temporary and will deliver the promised efficiency gains.

● Competition heating up: Commonwealth Bank of Australia (ASX: CBA), National Australia Bank (ASX: NAB), and Australia and New Zealand Banking Group (ASX: ANZ) won’t let Westpac take market share without a fight. Expect rivals to respond aggressively.

● Economic uncertainty: If Australia’s economy weakens, loan growth could slow and bad debts could rise, especially in commercial lending, where Westpac is growing fast.

Investor Takeaway: Good Bank, But Wait for a Better Price

Westpac delivered solid results with strong business banking growth, improved compliance, and a reliable dividend. The turnaround is real. The problem? At $38.75, the stock has already priced in most of this good news.
The 5% fully franked dividend yield provides decent income, and the balance sheet is strong with a 12.5% capital ratio. But with most brokers rating it Hold or Sell, and price targets averaging $33, there’s limited conviction for further gains.
For current holders: The dividend is a good reason to stay put. If management delivers on Project Unite, there could be more upside. Just don’t expect another 22% year.
For potential buyers: Wait for a pullback. A dip to the mid-$30s would offer better value. At current levels, you’re paying a premium for the transformation without much safety margin.

Bottom Line

Westpac’s FY2025 result proves the turnaround is working, business banking is growing, regulatory issues are resolved, and operations are improving. But at $38.75 and trading near 52-week highs, the stock has priced in the transformation story.
The key question is whether Westpac can defend margins as the RBA cuts rates while delivering on Project Unite. If they execute well, current prices could look fair. If costs blow out or margins collapse, those bearish $30-31 targets could be right.
For dividend seekers, the 5% fully franked dividend yield (meaning you get valuable tax credits on top of cash payments) offers decent income while you wait to see how things unfold. For bargain hunters, this one needs a pullback before it becomes compelling.