The share price of Westpac Banking Corp (ASX: WBC) drifted below $30 again yesterday after yet another sell-off in the banking sector dragged it and the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) lower.
This sell-off means the shares of Australia's oldest bank are trading down by close to 12% for the year and at a level I believe to be a good price for a long-term buy and hold investment. Especially with the shares now providing an estimated 6.3% dividend in FY 2016, well ahead of the 4.3% market average dividend.
Although the boom days that helped the banks achieve incredible profit growth appear to be over, I still feel Westpac can produce single-digit profit growth over the next few years that makes it a good investment today.
Last month Westpac reported a 3% increase in half-year profit to $3.9 billion, falling a little short of analysts' expectations of $4.1 billion. But overall I think this was a good result in a harsh environment.
Bad loans were to blame for the weaker-than-expected result. Management advised that the significantly higher impairment charges related to four large companies and added $252 million to its bad debt provisions. These companies are thought to include Arrium Ltd (ASX: ARI), Slater & Gordon Limited (ASX: SGH), McAleese, and Peabody Energy.
There are fears in the market that this could be the first of many large impairment charges, but chief executive Brian Hartzer appears more optimistic on matters. He stated that the impairment charges were driven more by company-specific problems rather than an economy-wide slump in credit quality.
Despite these bad debts edging up, there were positives to be found in the results. Westpac's consumer bank saw its profits jump by 16% to $1.44 billion and management's upbeat outlook on the segment was refreshing to hear.
All in all, I don't believe things are as bad as they might seem and I can see the share price edging higher in the future. Which when you include the market-beating dividend should provide investors with good total returns over the next few years.
I feel it is fair to presume that the banking sector is going to be very volatile over the next year or two. There are downside risks such as bad debts rising and a housing market crash that investors must take into account. But presently the Australian economy appears to be coming along very nicely and gives me reason to believe things will improve for the banks.
