Is the Westpac Banking Corp (ASX: WBC) share price a buy?
Westpac has had a solid 2019 so far with the share price up by 14.6% thanks to a variety of positive factors including the tame royal commission report, the Liberal federal election win, the RBA reducing interest rates and APRA saying it will reduce the interest rate buffer placed on potential borrowers.
If you were Westpac CEO Brian Hartzer, I don't think you could come up with a more pleasing chain of events in the first half of 2019.
Some investors may be looking at Westpac as the superior dividend idea compared to the other big four banks of Commonwealth Bank of Australia (ASX: CBA), Australia and New Zealand Banking Group (ASX: ANZ) and National Australia Bank Ltd (ASX: NAB).
NAB recently cut its dividend, it probably has a grossed-up dividend yield of 8.9%.
CBA has a trailing grossed-up dividend yield of 7.4%.
ANZ has a grossed-up dividend yield of 8.1%.
But Westpac has a grossed-up dividend yield of 9.6%. But who knows if the dividend will be maintained?
However, I don't think anyone should buy something just because of the yield. The underlying business needs to have positive growth prospects. Credit growth may make a small comeback if the housing market stabilises as many people think it might. Plus, the APRA interest rate buffer change could improve things for potential property buyers to afford a slightly more expensive mortgage & house.
But what I'm concerned about is that banks are seeing their 90+ day mortgage arrears rise. These borrowers are in significant mortgage distress if they are three months in arrears on their mortgage. If this doesn't start improving soon it could lead to higher bad debts for the bank.
Foolish takeaway
Westpac is trading at 12x FY20's estimated earnings. It seems cheap but there's a fair chance Westpac's earnings could take a large hit over the next year or two. When you add in the potential dangers of things like big tech payment systems taking a slice of Westpac's earnings over the longer-term, I don't think it's worth buying today, even in this low interest rate environment, due to the capital loss risk.
