Are Westpac Banking Corp shares cheap?

The banking sector has been on a bit of a rollercoaster this year with many ups and downs. This week we are witnessing another move upwards for the sector, with Westpac Banking Corp (ASX: WBC) being the stand out performer of the big four banks.

After steep declines in its share price three weeks ago, shareholders will be relieved to see it has climbed over 6.5% this week alone. Despite the great performance this week, its share price is still down nearly 10% so far this year.

Unsurprisingly, the embattled Australia and New Zealand Banking Group (ASX: ANZ) is the only big four bank to have performed worse, sitting on a decline of over 14% this year. Could this mean there is still room to run for Westpac’s share price?

The S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) has been on fire this week and it appears that investors are starting to feel confident again. I believe this has played a key part in helping pick Westpac’s share price off its lows.

I don’t think it is too late to pick up some Westpac shares, but I would only do so if you have limited exposure to the banking sector. The bargain prices from a week or two ago may have gone now, but there could still be reasonable share price gains ahead.

But there is also the potential for substantial downside risk in the next year or two that investors should be aware of. Bad debt levels are very low at the moment, but many economists expect them to rise substantially.

Some market observers believe the recent troubles we are witnessing at Arrium Ltd (ASX: ARI) are a sign of things to come. This would most likely affect profitability in the sector and set the big four banks off on a period of very low earnings growth.

But ultimately this is all speculation and could end up being many years away. Whereas right now Westpac is paying out an estimated FY 2016 fully franked divided with a yield of 6.2%. This makes it an attractive investment in my opinion and one which would complement a balanced portfolio.

Foolish takeaway

I believe the banking sector is going to be very volatile over the next 12 months, so an investment in Westpac today wouldn’t be for the faint-hearted. Investors looking for more stable shares to invest their hard-earned money in would probably be better off investing in these three blue chip shares which pay a great dividend and could see their share price soaring soon.

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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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