With a grossed-up dividend yield of 9.3%, is the Westpac Banking Corp (ASX: WBC) share price a buy?
It's an alluring yield because it's above 9% even after the recent dividend cut. That's because the Westpac share price is actually down 17% over the past three months, a similar amount to the dividend cut.
There are a number of things hurting sentiment about Westpac right now. At the top of the list is its failure to properly report transactions to AUSTRAC, a few of those transfers may have been for child exploitation. Westpac is probably facing a fine of at least $700 million, perhaps over $1 billion.
Westpac is also facing class actions for the AUSTRAC issues as well as things related to issues highlighted in the royal commissions.
At the start of the week it was also announced that APRA was going to increase Westpac's operational risk capital requirement by $500 million, which will decrease Westpac's Level 2, common equity tier 1 (CET1) by 16 basis points (0.16%).
On top of all that, Westpac's underlying cash profit for FY19 was pretty disappointing as it fell 4% excluding all of the royal commission remediation. Including the remediation, cash profit dropped by 15%. Dividends can't grow if profits are falling.
When you look at all of the above issues combined, the shorter-term looks a bit grim for Westpac. Medium-term profit also looks as though it will be lower than it could have been with APRA and the Reserve Bank of New Zealand (RBNZ) increasing capital requirements for all banks. Very low interest rates are causing a problem for the Westpac net interest margin (NIM), a key source of profit generation.
Foolish takeaway
I can't see the Westpac share price going above $30 for a long time. Westpac may be able to maintain the dividend at this lower level, but I think the bank may need to lower the dividend further if it wants to achieve growth in the next few years.
Westpac could be an interesting pick today for contrarian investors with the lower share price, but I think decent long-term growth looks unlikely.
