Why I think Westpac Banking Corp (ASX:WBC) shares are a buy

I think it is fair to say that the last 12 months have been challenging for the big four banks.

A slowing housing market, the Budget levy, and the Royal Commission have understandably weighed heavily on their shares, leaving the majority of them trading within sight of their 52-week lows.

And while trading conditions are not necessarily getting any easier for them, I believe recent out of cycle rises on variable mortgage rates will be a big help.

Because of this, I think now could be an opportune time to consider picking up bank shares if you don’t already have meaningful exposure to the sector.

Which bank shares should you buy?

My preference is Australia’s oldest bank, Westpac Banking Corp (ASX: WBC), closely followed by Australia and New Zealand Banking Group (ASX: ANZ).

Both these banks are trading on lower than historical average multiples and offer above-average dividend yields. Westpac’s shares currently offer a trailing fully franked 6.7% yield and ANZ Bank’s shares offer a trailing 5.6% yield.

Furthermore, unlike National Australia Bank Ltd (ASX: NAB), I believe they both could grow their dividends in FY 2019 due to the rate hikes and strong balance sheets. In respect to National Australia Bank, I feel that its low CET1 ratio and decision to not raise variable mortgage rates means that a dividend cut is a real possibility over the next 12 months.

Fellow big four bank, Commonwealth Bank of Australia (ASX: CBA), is another option to consider. However, I don’t believe it offers as compelling a risk/reward as Westpac and ANZ Bank at its current share price.

There are risks, though, let’s not forget. A housing market crash or another global financial crisis could cause sharp share price declines. However, I’m optimistic that these crises will be averted and allow many of the banks to continue growing earnings at a slow and steady rate over the coming years.

But if you're not keen on the banks or already have meaningful exposure to them, this top dividend share might be a better option.

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Motley Fool contributor James Mickleboro owns shares of 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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