Is the Westpac Banking Corp (ASX: WBC) share price a buy?
It has done quite well since the release of the Royal Commission report, it's up 6.3% in less than a month – not bad for a dividend share!
Westpac reported its first quarter earnings less than two weeks ago, so I'll quickly remind you what the big bank revealed.
First quarter cash earnings came in at $2.04 billion, which was 6.9% higher than the second half of FY18's quarterly average, although it was 0.5% lower when excluding the $281 million of remediation provisions. Westpac said the first FY19 quarter did not include any material remediation provisions and associated costs.
Westpac has been focusing on reducing its interest only lending, 32% of the portfolio was interest only at December 2018, compared to 35% at September 2018.
Australian mortgages which are in arrears of more than 90 days increased by four basis points, or 0.04%, to 0.76% of the total. This steady trend upwards of arrears is not very encouraging in an environment of falling house prices and rising interest rates.
Westpac remains well capitalised with a common equity tier 1 (CET1) capital ratio of 10.4% at 31 December 2018, although that was a reduction from 10.6% at 30 September 2018 due to the payment of the dividend.
With the Royal Commission over, the two risks for Westpac now seem to be the Australian housing market – which apparently is seeing a little bit more activity – and political pressure.
It remains to be seen how far the housing market will fall, but both political parties seem to want to be seen doing something about the banks. APRA and ASIC are probably going to be more forceful, and there are various ideas being considered such as a potential Labor idea to increase the bank levy.
Foolish takeaway
Westpac is trading at 11x FY19's estimated earnings with a grossed-up dividend yield of 10.1%. It does seem to be trading cheaply if its current earnings can be maintained for the foreseeable future, but there's no guarantee that will be the case. That's why I think it might be better to look elsewhere for now.
