Westpac Banking Corp (ASX: WBC) shares are getting slammed on Monday. The bank is down 4.5% to $36.22 in morning trade despite it delivering a $1.8 billion quarterly profit.
The decline leaves Westpac shares down around 6% year to date, compared with a 6% gain for the S&P/ASX 200 Index (ASX: XJO). Over 12 months, however, the bank remains up 8%, slightly ahead of the index's 4.5% gain.
So, what's spooking investors?
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Westpac delivers a mixed update
Westpac reported third-quarter net profit of $1.8 billion, excluding notable items, while net interest margin remained stable at 1.89%.
On the surface, the result looks reasonably solid. The bank delivered modest profit and revenue growth, while its balance sheet continued to expand and costs remained under control.
Housing credit increased 7% year over year, while customer deposits also grew 7%.
But there are some warning signs beneath the surface. Mortgage application volumes declined as competition intensified and borrowers continued to navigate uncertainty around interest rates. Westpac also expects margins to come under further pressure in the near term.
For a major bank whose profitability is heavily influenced by lending margins, that's not exactly music to shareholders' ears.
Credit quality remains strong
There was better news on the credit front. Westpac's impairment charges remained low, suggesting borrowers are continuing to manage their debts relatively well despite a challenging economic environment.
The bank also maintained a healthy provision buffer, with total provisions of $5.3 billion for expected credit losses.
Its balance sheet remains robust, with a common equity tier 1 (CET1) ratio of 12.1%, alongside solid funding and liquidity positions.
That gives Westpac plenty of capital flexibility to support its operations and return money to investors of Westpac shares.
What's next for Westpac shares?
The big question for investors is whether slowing lending growth and margin pressure can be offset by continued cost discipline and strong credit quality.
Westpac expects the operating environment to remain highly competitive, particularly in mortgages. Management will also be keeping a close eye on consumer spending, credit risks, and regulatory changes.
For investors, Monday's sell-off appears to reflect concerns about the outlook, rather than a major deterioration in Westpac's current financial health.
The bank remains profitable, well capitalised, and growing its loan and deposit base.
But with Westpac shares already delivering solid gains over the past year, investors may now be demanding more and the prospect of weaker margins could be enough to take some shine off the stock.
