Is the Westpac Banking Corp (ASX: WBC) share price a buy?
For me, that question needs to be asked about the shorter-term and the longer-term.
In the shorter-term it seems that the Australian economy seems to heading in a better direction after the Liberal election win, the RBA interest rate cuts and the APRA change. House prices seem as though they are no longer dropping.
With the above factors in mind, ASX banks like Westpac, Commonwealth Bank of Australia (ASX: CBA), National Australia Bank Ltd (ASX: NAB) and Australia and New Zealand Banking Group (ASX: ANZ) could all be a bit safer.
Banks deserve to trade at a lower valuation because of their huge balance sheets, but they do look comparatively attractive. Westpac is trading at only 13x FY20’s estimated earnings with a grossed-up dividend yield of 9.8%.
However, some analysts believe that a Westpac dividend cut may be coming, perhaps around 10%.
In the longer-term banks like Westpac may face more competition from US tech giants and new Australian ‘neobanks’ which reduces its market share, pricing power and earnings, particularly in areas like transaction accounts, savings accounts and merchant fees.
Another risk is ultra-low interest rates. Banks earn a profit on the difference between the money they borrow and then lend out to regular borrowers like us. But central banks are finding it very difficult to get interest rates to a more normal rate.
The economic next crisis may see interest rates go (back) to 0%. ASX banks will find it difficult to make decent profits in a 0% interest rate world – just look at how European banks have done since the GFC.
Westpac may make sense for a retiree portfolio for income, but I don’t think many people should think about ASX banks for a long-term investment portfolio.
Instead, I’d much rather buy shares of better defensive shares like these ones.
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Motley Fool contributor Tristan Harrison has no position in any of the stocks 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.