The Westpac Banking Corp (ASX: WBC) share price is down more than 5% from 31 July 2024, as shown on the chart below. Valuations declines can open up buying opportunities, if the valuation has fallen far enough.
The global share market was experiencing significant volatility a week ago as investors fretted about the possibility of recession in the US.
But, what's happening in the US doesn't necessarily need to worry investors in Australia. Up until now, the overall Australian economy has been remarkably resilient amid elevated inflation and a higher cost of living.
Let's consider whether the Westpac share price decline could be enough to make it appealing for investors.
Weakening profit forecast
There are usually two key elements that can drive a share price higher. Rising earnings can encourage investors to pay more over time. Investors can also decide to be willing to pay a higher multiple for those earnings, which is called the price-earnings (P/E) ratio.
On the face of it, the 29% rise in the Westpac share price over the past 12 months has been driven by investors' willingness to buy at a higher P/E ratio. However, the P/E ratio can only rise so far before the valuation is unsustainable unless profit growth can justify that higher valuation.
UBS has forecasted that the reported net profit will fall to $6.9 billion in FY24 and then fall again to $6.7 billion in FY25.
Those forecast profit declines come despite UBS analysts upgrading their net interest margin (NIM) expectations, as well as better-than-expected impairment charges in the FY24 first-half result.
The consumer division accounts for 46% of Westpac's total allocated capital, according to the broker. However, it's only generating a return of an average of approximately 9%, which is the lowest it's been over the past three years. The low returns on mortgages "face structural headwinds", which could impede the recovery of the ASX bank share's return on equity (ROE).
Not all negative
The ASX bank share is experiencing ongoing competitive pressures in home lending, but this is "more than offset by strong markets and treasury performance and higher earnings on capital and deposits", according to UBS.
The broker suggests that Westpac is "making some progress" on addressing the cost base. UBS notes that the market is pleased with the increased share buyback and special dividends.
Is the Westpac share price a buy?
In the longer term, UBS thinks profit will return to growth in FY26, reaching $7 billion. It could increase again to $7.3 billion in FY27 and improve to $7.7 billion in FY28.
However, while the long-term profit outlook is positive, UBS' forecasts suggest the Westpac share price is valued at around 15x FY25's estimated earnings, compared to a 10-year historical average of around 12x.
The ASX bank share is trading at a higher earnings multiple than it has in the last decade. That's why UBS has a sell rating on Westpac shares with a price target of just $24.
