Is the Westpac Banking Corp (ASX: WBC) share price a buy?
Westpac shares have actually fallen by more than 10% over the past month. The last five months have been a rollercoaster for ASX banks. The Westpac share price fell by 46% between 21 February 2020 and 23 March 2020. It has since rallied 26% higher from the low.
There are a couple of important points about why Westpac’s share price is justifiably higher than it was a few months ago
As one of the big four ASX banks, Westpac’s performance is linked to how the broader economy. Things were looking grim in March 2020 when it was estimated that the jobkeeper package would cost $130 billion. But then it turned out that that estimate was probably $60 billion too high. Less damage to the economy should mean less damage to the Westpac balance sheet.
CoreLogic releases a monthly update about house price movements. Whilst May and June have shown a bit of a decline, there hasn’t been a widespread crash that some economists were fearing.
The second reason to be positive about the Westpac share price is that Australia has mostly gotten COVID-19 under control. Every state except Victoria is reporting there isn’t any community transmission going on. Victoria was also reporting very limited community spread a few weeks ago.
A negative turn
The introduction of lockdowns in Melbourne is definitely not what anyone wanted. A return to limited economic activity will save lives, which is the most important thing. It will mean a slower recovery for the overall economy and the second outbreak could cause a lot more financial pain in Australia’s second biggest city.
It’s a good thing that banks have announced they will extend loan repayment holidays for another four months if borrowers are still experiencing financial hardship. That includes other big ASX banks like Commonwealth Bank of Australia (ASX: CBA), National Australia Bank Ltd (ASX: NAB) and Australia and New Zealand Banking Group (ASX: ANZ). The extension will give borrowers more time to recover from the COVID-19 impacts and hopefully avoid a wave of fire sales of property across the country.
When Westpac released its FY20 half-year result (HY20) it increased its provisions for expected credit losses to $5.8 billion, which included approximately $1.6 billion of additional impairment charges predominately related to COVID-19 impacts. Only time will tell whether this estimate was too low or about right.
The overall HY20 result was pretty tough for shareholders. Cash profit was down 70% to $993 million. Even after excluding ‘notable items’, cash profit was still down 44% to $2.3 billion. Investors were expecting this type of result, it’s why the Westpac share price was down so heavily.
Another problem on the horizon is the upcoming AUSTRAC penalty for failing to properly report some international transfers. Westpac provisioned $900 million for the fine but it could end up being $1 billion or more.
Is Westpac a good ASX share to buy at this price?
A few months ago I was saying that ASX banks could be decent buys if the recovery was faster than expected. That seems to have happened – Australia is largely heading in the right direction. That’s why the Westpac share price is higher than it was in March and April 2020.
But I don’t think Westpac is out of the woods yet. The RBA interest rate is now very low at just 0.25%. It’s hard for banks to maintain their net interest margin (NIM) if the central bank rate is very lower. A lower NIM will probably result in a lower net profit for Westpac. Interest rates could be very low for some time.
I don’t think we can buy Westpac shares for the dividend. The interim dividend was deferred and I think the final dividend will probably be reduced by at least 50%.
Westpac is trading at 13x FY21’s estimated earnings. I don’t think it’s cheap enough to warrant buying at this price considering all of the economic uncertainty over the next 12 months.
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Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. 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.