CBA vs. Westpac: Is the Market Overreacting?

20 Feb 2025 | Stock Insight

Australia’s Banking Giants Face a Changing Landscape

With the Reserve Bank of Australia (RBA) cutting the cash rate by 25 basis points to 4.1%, all eyes are on how the major banks will adapt. Lower rates may provide relief for borrowers, but they also pressure bank margins. This week, we revisit two of Australia’s biggest financial institutions Commonwealth Bank (ASX: CBA) and Westpac (ASX: WBC) to assess their latest results and whether the market reaction has been justified.

We last examined these two banks in late 2024, highlighting our concerns around valuations and Westpac’s rising costs. As we reassess today, those concerns remain, though the outlook for each bank has evolved.

Commonwealth Bank of Australia (ASX: CBA): The Profitability Leader

CBA continues to set the gold standard among Australia’s major banks, delivering strong results that surpassed expectations. Half-year net profit after tax (NPAT) came in at $5.13 billion, a figure supported by higher loan growth and lower loan impairments – no small feat given the inflationary environment and rising cost of living.

On the risk front, mortgage arrears have nudged slightly higher to 0.66% (from the historical average of 0.65%), but overall non-performing exposures have actually declined from 0.98% to 0.95%. This is critical, as we previously flagged CBA’s high exposure to housing risk. So far, the bank appears to be managing it well.

CBA remains the leader in net interest margin (NIM), which ticked up slightly to 2.08%, a strong performance considering the broader margin pressure across the industry. While we expect this to decline slightly over the next year due to rate cuts, CBA’s disciplined balance sheet management should provide a buffer.

Operating expenses did increase by 6%, though much of this was tied to strategic investment in technology and digital transformation rather than spiraling wage costs. Importantly, 77% of the bank’s funding comes from customer deposits, reinforcing its stability in uncertain market conditions.

For income-focused investors, CBA announced a 5% dividend increase, with an interim payout of $2.25 per share. However, at current share prices, the yield still sits about 100 basis points below what’s available through a 12-month term deposit with the same bank a reminder that valuation remains a key consideration.

Key Takeaways for CBA:

Strengths: Industry-leading profitability, strong NIMs, disciplined management.
Weaknesses: Heavy reliance on the housing market, expensive valuation (P/E ratio of 27).

Westpac (ASX: WBC): The Mixed Performer

In contrast to CBA’s strong performance, Westpac’s latest results have been met with skepticism, with Morgan Stanley cutting its price target to $29.20. But is the market overreacting?

At first glance, headline profit fell 9% to $1.7 billion in Q1, which has triggered concern. However, this was primarily due to hedging provisions, which are expected to unwind over time. Adjusting for this, underlying NPAT actually grew by 3% to $1.9 billion, a more positive signal than the initial headline suggests.

Westpac’s loan-to-deposit ratio improved to 83.9%, and its CET1 capital ratio of 11.9% remains robust. However, the real concern lies in its credit quality and operational performance compared to CBA.

Non-performing assets: 1.39% (compared to CBA’s 0.95%)
Mortgage arrears: 1.03% (notably higher than CBA’s 0.66%)
NIMs: Declined to 1.81%, continuing a downward trend
Return on Equity (ROE): Dropped 88 basis points to 9.4%

Operationally, Westpac’s digital transformation and cost-cutting initiatives appear to be progressing, which could provide benefits in the coming years. However, the bank is still grappling with higher costs and declining margins, making execution risk a key concern.

Key Takeaways for Westpac:

Strengths: Strong capital position, ongoing digital transformation.
Weaknesses: Lower NIMs, higher arrears, execution risk.

The Tamim Takeaway

With interest rates shifting, the performance of Australia’s major banks will be closely watched.

CBA remains the standout, delivering exceptional results with strong risk management and continued leadership in profitability. However, its premium valuation means new investors should weigh the price before jumping in.

Westpac, while not as bad as the headlines suggest, still has hurdles to overcome. The bank’s cost-cutting and digital strategy could bear fruit over time, but higher arrears and declining NIMs make it a riskier proposition than CBA.

For investors, CBA offers stability and strong execution, albeit at a high price, while Westpac may provide value if it can successfully navigate its current challenges.

Would we hold either? That depends on your risk appetite and whether you believe Westpac can turn things around. At Tamim, we’re always looking for well-managed businesses at attractive prices something to keep in mind when evaluating these two banking giants.

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Disclaimer: Commonwealth Bank of Australia (ASX: CBA) is held in TAMIM Portfolios as at date of article publication. Holdings can change substantially at any given time.