Westpac Banking Corp (ASX: WBC) is Australia's second-biggest bank and a favourite among risk-averse dividend-hungry investors. Despite its share price increasing 55% in the past two years alone, with interest rates low (and potentially going lower) it appears investors are still seeing value in the stock.
However, I believe investors are actually biting off more risk than they can chew if they choose to buy Westpac anyway near today's prices. Here are five reasons why I think Westpac is not a 'Buy'.
1. Shares are expensive! Westpac trades on a P/E of 15, price book ratio of 2.26 and price-earnings growth ratio of 3.33. For a company expected to increase earnings per share by only 7.5% in FY14, it's very expensive.
2. Non-interest income only grew by 9.5%. Banks draw most of their money from lending (i.e. interest income) but Westpac's management have identified non-interest income (wealth management, insurance etc.) as a key earnings driver in coming years. However a 9.5% increase in non-interest income between March 2013 and March 2014 is not enough to justify the bank's current price. Especially when you consider it only contributed 16% of total income.
3. Net profit increased 7.24%. Between the March 2013 and March 2014 half-yearly reporting periods, net profit attributable to owners of Westpac increased by only 7.24%, when the effect of reduced impairment charges are removed. For a P/E of 15, I'd want a lot more than that.
4. No significant growth strategy. Unlike Australia and New Zealand Banking Group (ASX: ANZ) who has a sound Asian strategy, Westpac's low forecast earnings growth can be attributed to its lack of a significant growth strategy. Analysts are expecting low-single digit earnings per share growth from Westpac as a result.
5. Better alternatives.
Westpac offers brand recognition and a 5.3% fully franked dividend yield. However, with over 2,000 companies listed on the ASX there's many other cheaper alternative investments offering even more!
