The Westpac Banking Corp (ASX: WBC) share price has dropped around 10% since February 2023. With the 2024 Australian financial year about to start, it could be a good time to evaluate the ASX bank share.
That fall of the bank's valuation seemed to start when the Commonwealth Bank of Australia (ASX: CBA) CEO spoke of intense competition in the banking space. A decline in lending margins, as shown by a fall in the net interest margin (NIM) would be bad news for profitability.
Weaker times expected
Westpac reported its FY23 half-year result in May, which was for the six-month period to 31 March 2023, which showed a pleasing increase in profitability – net profit rose by 22% year over year as the underlying business showed a good performance thanks to a rise in the core NIM of 20 basis points (year over year) to 1.90% following the RBA interest rate rises.
The ASX bank share's operating expenses fell 7%, though it did suffer from wage increases and third-party vendor costs.
However, the outlook commentary was not very positive. It said that its loan portfolios remained "healthy" and mortgage delinquency levels are low.
Westpac expects to see "more stress in the period ahead, particularly in small business." The bank also said the economy is expected to slow over the rest of 2023, with easing credit growth across housing and business.
The most important line may have been that "intense mortgage competition is expected to negatively impact industry and Westpac's margins in the next half." That's not a promising sign.
Is the Westpac Banking Corp share price good value?
The market seems to be fully aware of the situation with competition and banks – that's seemingly why the market has pushed ASX bank share valuations lower.
But, it's possible that the market may be overly pessimistic about the bank, if things turn out better than expected. It's not exactly trading on an expensive price/earnings (P/E) ratio.
Estimates on Commsec suggest that Westpac could generate earnings per share (EPS) of $2.12 in FY23, which would be a solid improvement in profit compared to FY22. This would put the Westpac share price at 10 times FY23's estimated earnings.
However, EPS could then fall by 8% to $1.95 in FY24, which would mean Westpac shares are priced at 11 times FY24's estimated earnings.
I don't think it's likely that the bank suddenly shoots 10% higher. There could be an increasing number of borrowers that go into arrears due to the higher interest rates if the RBA cash rate stays above 4% for an extended period of time.
If interest rates start reducing during FY24 then that could prove to be the most helpful catalyst for investor sentiment and boost the P/E ratio.
However, the Westpac dividend could be rewarding for shareholders, with projections of grossed-up dividend yields of 9.4% in FY23 and 9.6% in FY24.
