Despite reporting a 3% jump in half-year profit last week, shares of Westpac Banking Corp (ASX: WBC) have failed to move meaningfully higher.

Source: Google Finance

Source: Google Finance

Are Westpac shares a buy?

Once a company reports its results to the market, a wrath of new analyst ratings will emerge. According to Dow Jones Newswires, following Westpac’s largely expected profit result last week, four major investment banks downgraded their price targets on its shares:

  • Macquarie – cut 3.1% to $31
  • Credit Suisse – cut 5.4% to $35
  • Bell Potter – cut 2% to $32.35
  • Deutsche Bank – cut 3.8% to $33.10

The average price target of these analysts, being $32.86, compares favourably to Westpac’s current share price of $31.10. According to Thomson Reuters the consensus among 15 analysts polled is an ‘outperform’ rating on Westpac shares.

Margin of safety

Interpreting an analyst’s price target is easy: If the analyst says it’s worth more than the current price, buy shares; if not, sell.

However, it’s vital investors consider the risks inherent in every investment before buying in – just like you would with an investment property.

Indeed, currently, many commentators appear sceptical that Australia’s major banks, including Westpac, will be able to maintain the strong growth which the market has become accustomed to. In addition to regulatory risks, a potentially slowing property market and intense competition, analysts are questioning whether the tide could be turning on bad debts.

If bad debts rise, bank profits are unlikely to hold up.

Foolish takeaway

It’s far from certain that bad debts will rise in the immediate future, however, investors should consider the possibility and act accordingly. If you’re already heavily exposed to the banking sector it may be time to look elsewhere. However, if you’re bullish on banks and are actively seeking dividend income, Westpac shares may warrant further investigation.

Personally, I’m sitting on the sidelines, at least until their full-year reports are released later in the year.

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Motley Fool Contributor Owen Raszkiewicz does not have a financial interest in any company mentioned. Owen welcomes -- and encourages -- your feedback on Google+, LinkedIn or you can follow him on Twitter @ASXinvest.

We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.