Westpac (ASX:WBC) share price falls on margin pressure concerns

Why is this banking giant under pressure today?

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The Westpac Banking Corp (ASX: WBC) share price is trading lower on Tuesday following the release of its third quarter update.

At the time of writing, the banking giant’s shares are down 1% to $25.55.

Despite this, the Westpac share price is still up 4% since the start of the month.

What did Westpac report?

This morning Westpac released an update on its capital, funding, and asset quality for the three months ended 30 June.

Australia’s oldest bank revealed a CET1 ratio of 12% on a reported basis and 12.5% on a pro forma basis. This is significantly higher than APRA’s unquestionably strong benchmark of 10.5%. As a result, the Westpac Board indicated that it will consider a further return of capital to shareholders. An update on this will be made with its FY 2021 results later this year.

Also of note was that its stressed assets to total committed exposures (TCE) reduced 9 basis points to 1.51% and its mortgage 90+ day delinquencies also fell 9 basis points to 1.11% in Australia.

Why is the Westpac share price falling?

One thing that could be weighing on the Westpac share price today was its outlook.

The bank once again reiterated that it was facing net interest margin (NIM) headwinds and therefore expected its second half NIM to be lower than what was achieved in the first half. It also reaffirmed its expectation for its expenses to be higher year on year in FY 2021.

What was the reaction?

Goldman Sachs has been running the rule over the update and notes that it was broadly in line with expectations.

However, one thing that was a pleasant surprise to the broker was the potential for further capital management. In light of this, it is a little surprising the Westpac share price is underperforming today. Though, the broker suspects that this could be due to concerns that the margin headwinds the bank is facing may be greater than anticipated.

Goldman commented: “Both capital and asset quality are run-rating broadly consistent with our current forecasts. That said, management’s explicit commentary around its surplus capital and franking position, which will see the Board consider a return of capital, with an update at its FY21 results, does bode well for shareholders.”

“Against this, while no earnings update has been provided, the fact management explicitly reiterated its 2H21 considerations in relation to NIMs and expenses, suggests that pressure on both these line items might be greater than what is currently reflected in consensus forecasts, particularly given WBC’s improved momentum in mortgage volumes.”

Goldman Sachs has a buy rating and $29.03 price target on the bank’s shares. Based on the current Westpac share price, this implies potential upside of 13.5% over the next 12 months.

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Motley Fool contributor James Mickleboro owns shares of Westpac Banking Corporation. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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