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Westpac Banking Corp’s (ASX:WBC) share price looks poised to re-test its 5-year lows

The share price of Westpac Banking Corp (ASX: WBC) is getting slugged after the bank reported much weaker than expected margins in its latest quarterly update today.

The stock tumbled 1.9% to $27.82 in after lunch trade when the S&P/ASX 200 (Index:^AXJO) (ASX: XJO) is up 0.2% and I think it’s set to retest its five-year low of $27.30 that it hit in June this year.

What’s interesting is that the margin pressure is seen as being largely a Westpac only issue judging by the share price performance of its peers. Commonwealth Bank of Australia (ASX: CBA), National Australia Bank Ltd. (ASX: NAB) and Australia and New Zealand Banking Group (ASX: ANZ) are either trading higher or just below breakeven at the time of writing.

The funny thing is that the margin squeeze is an industry-wide issue, particularly for the big four banks as they have not only refused to raise mortgage rates like their smaller rivals but have cut rates on some of their loans to win market share.

Westpac reported that its net interest margin (NIM) in the June quarter fell to 2.06% compared to 2.17% for the first half of the current financial year.

Higher short-term funding costs explain the 5 of the 11 basis point (bps) reduction in the NIM, while lower contribution from Group Treasury from the lack of market opportunities subtracted another 4bps. The rest of the margin cut was from the conversion from the more lucrative interest-only loans to principle plus interest and new home loan discounts.

Some margin pressure was expected as the funding challenges and home loan discounting is well understood by the market, but few would have been expecting such a big drop in NIM. Citigroup, for instance, was forecasting NIM at 2.1%.

The bad news on margins could very well spell the end of the mortgage rate honeymoon that house buyers have enjoyed in the last several years!

Commbank and NAB are probably in the clear as they handed in their profit results earlier this month and their margins looked fine. ANZ Bank has stopped issuing quarterlies and investors will have to wait till the end of October to find out if there are any nasty NIM surprises.

But I suspect the sector will be feeling increased pressure in the current quarter unless they have lifted mortgage rates.

This isn’t the time yet to be buying the big banks even with their seemingly low valuation and high yields. I’ve said before that we could be nearing a point where I would up my underweight position in the banks – the time isn’t here just yet.

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Motley Fool contributor Brendon Lau owns shares of Australia & New Zealand Banking Group Limited, National Australia Bank Limited, and Westpac Banking. The Motley Fool Australia owns shares of National Australia Bank Limited. 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 Scott Phillips.

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