Is the Westpac share price in the buy zone?

2018 was a disappointing year for Australia’s 2nd largest bank, Westpac Banking Corp (ASX:WBC). The banking giant’s share price fell 20.1% on the back of a cooling property market, rising funding costs and a myriad of scandals that were revealed during the Financial Services Royal Commission.

With the S&P/ASX 200 (Index: ^AXJO) (ASX:XJO) falling by 6.9% in 2018, shares in Westpac underperformed the market by 13.2% excluding dividends. The Westpac share price is also down 21% from its 52-week high of $31.74 in January 2018. Moreover, the sell-off in global equity markets over the last couple of months saw Westpac’s share price fall to a low of $23.30, a price not seen since August 2012.

Fellow big banks Australia and New Zealand Banking Group (ASX:ANZ), Commonwealth Bank of Australia (ASX:CBA) and National Australia Bank Ltd (ASX:NAB) also underperformed the ASX 200 in 2018 with losses of 14.9%, 9.9% and 18.6% respectively.

Value territory? 

The current consensus estimate for FY19 earnings per share stands at $2.37, which means Westpac is trading for less than 11 times forward earnings at current prices. This is a lower valuation multiple than what the bank has traditionally traded at for over the last several years in the post-GFC climate.

Investors should note that forward projections for the company’s FY19 earnings have fallen by 5.5% over the last 12 months to reflect the increasingly challenging operating environment the bank is facing.

For income investors, shares in Westpac are trading at a dividend yield of 7.5% that comes attached with full franking credits. This would represent a grossed-up dividend yield of around 10.7%. A grossed-up yield of over 10% has traditionally been an attractive entry point for income focused investors in the banking sector, in particular for those with self-managed super funds.

Foolish takeaway

On a number of valuation metrics shares of Westpac appear to be historically undervalued. However, with the Australian property market still falling and yet to establish a bottom it might still be a bit premature to start buying up shares in the big banks.

Furthermore, with the Hayne Royal Commission report not due till February, a wait and see approach might be be the best course of action before buying shares in Westpac or in any of the other big banks.

Motley Fool contributor Tim Katavic has no financial interest in any company mentioned. 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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