The Westpac Banking Corp (ASX: WBC) share price is close to a 52-week high, as shown on the chart below. Some investors may be attracted to the momentum that the business is generating.
Past performance is not a guarantee of future performance, but Westpac has delivered one of the most pleasing performances from an ASX blue-chip share over the past year. It has gone up by 60% in 12 months – an incredible performance.
Is this the right time to invest in the ASX bank share? In my view, there are a few things that I believe investors should keep in mind.
Strong competition is hurting margins
In the FY24 result, Westpac reported that its net profit declined by 3% to $7 billion, with the underlying net interest margin (NIM) – a measure of lending profitability – showing a decrease of 1 basis point (0.01%) to 1.95%. A decline in profitability isn't helpful for Westpac shares.
Westpac explained that the decline with the NIM reflected competition in mortgage pricing as well as lower profit margins on cards, some deposits and business lending products.
I'm not surprised that the competition is strong. Just think about all of the lenders on the ASX that Westpac is competing with, such as Commonwealth Bank of Australia (ASX: CBA), National Australia Bank Ltd (ASX: NAB), ANZ Group Holdings Ltd (ASX: ANZ), Macquarie Group Ltd (ASX: MQG), Bank of Queensland Ltd (ASX: BOQ) and Bendigo and Adelaide Bank Ltd (ASX: BEN).
A large national branch network does not provide the same competitive advantages as it used to, in my opinion, due to internet banking and brokers. I'm not expecting Westpac's NIM to return to the previous highs of the past.
Rising arrears
Not only is there relatively low credit demand because of high interest rates, but the expensive cost of debt is also stretching households' finances.
According to Westpac, the percentage of Australian mortgages that were at least 90 days overdue grew to 1.12% in September 2024, up from 0.86% in September 2023.
The percentage of loans that were at least 30 days overdue increased to 1.82%, up from 1.54% at September 2023.
If these numbers keep increasing, it is likely to be a headwind for profit, cash flow and the dividend.
Weak profit forecast
Considering that the bank made $7.1 billion in profit in FY24, it's not exciting to read that broker UBS is forecasting that Westpac's FY25 net profit could decline to $7.02 billion in the 2025 financial year.
At the current Westpac share price, it's valued at 17x FY25's estimated earnings.
My verdict on the Westpac share price
With a challenging operating environment, strong competition, and limited profit growth potential, I'm not attracted to buying Westpac shares at this valuation.
I like the old advice that buying banks at a price-to-book ratio of close to 1 is the way to go. According to UBS, Westpac shares are trading at a price-to-book ratio of close to 1.5x for FY25. Therefore, it'd need to drop by close to a third for me to be interested in its valuation.
