Is the Westpac Banking Corp (ASX: WBC) share price a buy?
The Westpac share price has risen by 12.3% over the past two weeks. Not bad for a business that a lot of investors are counting out.
I suppose the market is simply saying that the Westpac's troubles won't be quite as bad as previously expected.
The Westpac share price is still down 40% compared to where it was before. That's a large decline. There have been quite a few leadership changes within Westpac recently. Hopefully that's a positive sign of renewal rather than anything else.
It's not too surprising that the Westpac share price has dropped so hard. The recent Westpac FY20 half-year result outlined a number of the issues.
The statutory profit dropped 62% to $1.19 billion and cash earnings were down 70% to $993 million. When you exclude notable items, cash profit was still down 44%.
A significant part of the decline came about from higher impairment charges due to COVID-19. Westpac's provisions for expected credit losses increased to $5.8 billion which included $1.6 billion of additional impairment charges predominately related to COVID-19 impacts.
Another problem that Westpac provisioned for is the upcoming AUSTRAC penalty. The bank has provisioned $900 million. Some don't think that's a big enough number.
What will cause the Westpac share price to rise further?
The recent news that not as many people are on jobkeeper as previously expected was positive. That's a good sign for the overall economy and it hopefully means there would be less bad debts for the bank. That's seemingly what caused the Westpac share price to rise over the past fortnight.
But beyond that, investors are waiting for more signs of a recovery for the banking sector. We're still quite early into this crisis. Australia has been fortunate compared to most places in the world when it comes to the spread of the coronavirus. It will take a while for the full effect of the restrictions to be felt economically across the country.
The rest of the world is still going through the pandemic, so there could be more economic pain to wash through the global economy. Westpac will also have to come to terms with the very low interest rate which may harm the net interest margin (NIM) for some time.
How long will it take the Westpac share price to return to above $25? It could take a very long time. But if Australia's banking system is safer than expected, there could be a bit more value at the current level. I'm not making that bet yet though.
