Is Westpac Banking Corp a bargain at this share price?

Credit: Kiwiteen123

Traditionally banking shares have a tendency to be reasonably stable investments, but in 2016 they have been anything but that with more ups and downs than a rollercoaster.

The volatility they have exhibited so far in 2016 is what you might expect from mining shares like BHP Billiton Limited (ASX: BHP) and Santos Ltd (ASX: STO).

Nobody quite knows if or when this will settle down, but one thing that I believe we can say is that at the current price there is potential for upside for shareholders of Westpac Banking Corp (ASX: WBC).

Just over a month ago when the share price dropped to the same level it is at today, there was an almighty rally which saw it climb by 15% within the space of two weeks. Whilst past performance is not an indication of future returns, I feel the current price is an opportunity for investors.

The investment is not without risk though. Westpac was recently embroiled in the scandal surrounding Australia and New Zealand Banking Group (ASX: ANZ) regarding the manipulation of the bank bill swap rate. CEO Brian Hartzer has said Westpac had done nothing wrong and would defend itself in court.

Additionally, there are of course dangers that bad debt levels could rise. This was highlighted this week when Arrium Ltd (ASX: ARI) fell into administration. Arrium has significant unsecured debt provided by the big four banks.

But I do take comfort from recent research by Macquarie Group Ltd (ASX: MQG) which showed that Westpac has the least exposure to sub-investment grade and BBB- rated lenders in its mining portfolio.

I think Westpac has a bright future. I have been impressed with the way in which it has embraced new technologies. It is heavily involved with the development of Blockchain in the industry.

Many believe Blockchain could shake up the industry, so being part of a consortium developing a new Blockchain framework for financial institutions is a good move and could safeguard its future.

At the current share price the company will pay an estimated full year fully franked dividend with a 6.6% yield. ANZ may provide a better yield for its shareholders, but I believe Westpac’s is much more secure and less likely to be cut in the future due to its stronger balance sheet.

Foolish takeaway

Whilst it is a difficult time for banking shares, I do believe the current Westpac share price is just too good to refuse. I expect to see the share price rally again like it did around a month ago, which should provide investors with good returns.

One thing that attracts me to Westpac, is that it pays a great dividend. If a great fully franked dividend is what you are looking for then look no further than this top pick by our dividend expert.

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Motley Fool contributor James Mickleboro has no position in any stocks mentioned. 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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