Is Westpac Banking Corp a buy at today’s share price?

Credit: Kiwiteen123

Last week the big four banks lost a combined $20 billion of their market value after an announcement to the market by Australia and New Zealand Banking Group (ASX: ANZ).

ANZ announced that its exposure to the resources sector would mean at least an additional $100 million in bad debt charges for this half of the 2016 financial year. This set alarm bells ringing for investors who clearly fear it could be a similar story for the other big four banks.

The news meant the shares of Westpac Banking Corp (ASX: WBC) finished the four-day week down by almost 6%. With potential bad debt charges now being priced into the share price, I believe today would be an opportune time to buy the shares of Westpac.

According to research from Macquarie Group Ltd (ASX: MQG), courtesy of the Australian Financial Review, Westpac has the least exposure to sub-investment grade and BBB- rated lenders in its mining portfolio.

I have a feeling this could settle the nerves of investors and let them focus on the positives that may lay ahead. Also, at the current price the shares of Australia’s second-largest bank pay an estimated dividend equivalent to 6.2% fully franked in the next 12 months.

In the past few months there have been concerns floating around the market that the banks would have to raise additional capital or follow in the footsteps of BHP Billiton Limited (ASX: BHP) and cut their dividends.

But Westpac has recently managed to strengthen its all important capital ratio to 10.2% from the 9.5% it produced in September. This strengthening should hopefully mean the bank will not be required to raise further capital, nor cut its dividend.

At the current price the shares are trading at an estimated forward price to earnings ratio a fraction over 12. In my opinion this makes them better value than Commonwealth Bank of Australia (ASX: CBA), which trades at over 13 times estimated forward earnings.

Foolish takeaway

I believe this recent sell-off was somewhat unjust and means Westpac represents a good buy at the current price, especially with the market-beating dividend it is paying to shareholders. If the market volatility we experienced at the start of the year were to return again, then the shares could yet be dragged lower. But for now, I see the current price as being a bit of a gift to investors.

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Motley Fool contributor James Mickleboro has no position in any stocks mentioned. Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia has no position in any of the stocks mentioned. 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.

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