Westpac Banking Corp (ASX: WBC) shares took a beating on Monday, falling 6% to $35.70 after the bank released its third-quarter update.
A fall like that can quickly make a blue-chip share look more tempting.
But has enough changed for me to reconsider Westpac?
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What worried the market?
The quarterly profit itself was reasonably solid.
Westpac reported $1.8 billion of net profit excluding notable items, up 2% compared with the first-half quarterly average. Net interest margin was also steady at 1.89%.
The bigger concern for me sits further down the road.
Westpac's investor presentation showed that mortgage applications have slowed noticeably. Average monthly applications were around 29,000 during the third quarter, with the post-budget run rate dropping further to approximately 26,000.
This is important because home lending is a huge part of Westpac's business.
Its Australian mortgage portfolio stood at $529.1 billion at the end of June. Around two-thirds of that was owner-occupied lending.
If fewer Australians are applying for mortgages, that could make it harder for Westpac to maintain strong housing loan growth in the quarters ahead.
Westpac stated that it expects Australian housing credit growth to slow from 6.8% in FY26 to 4.7% in FY27.
That does little to ease the concerns I already had about the bank.
Why I am still cautious
I have been cautious on Westpac because of its heavy exposure to Australian households and housing.
The latest update has reinforced that view.
Higher interest rates are putting pressure on borrowers, while Westpac noted that consumer spending has slowed marginally. The bank has also increased the severity of the downside economic scenario used to calculate its impairment provisions.
Credit quality remains fairly resilient for now. Australian mortgage 90-day delinquencies were 0.58% at the end of June, while 85% of mortgage balances were ahead on repayments when offset accounts were included.
I think that is reassuring, but it does not remove my concern about future growth.
A bank can have healthy existing borrowers while still facing a tougher environment for writing new loans.
That distinction is particularly important for Westpac because I would prefer greater exposure to areas of banking that could grow independently of Australian housing.
There were positives
I do not think the update was poor across the board.
Business lending increased by 4% during the quarter, deposits grew by 2%, and the bank's capital position remained comfortably above its target.
Westpac is also investing in its business banking presence, including the addition of 150 regional business bankers. I think that is sensible and could gradually broaden its earnings base.
But those positives are not enough to change my view today.
The sharp share price fall may have improved the entry point, but the mortgage application slowdown gives me another reason to remain cautious rather than treat the weakness as an automatic buying opportunity.
Foolish takeaway
I would continue to avoid Westpac shares for now.
The third-quarter result showed that the bank remains profitable and financially strong, but the slowdown in mortgage applications reinforces my concerns about its exposure to the Australian housing market.
Broker earnings forecasts may also change following the update, so I would rather wait and see how expectations settle before reassessing the valuation.
For investors looking at the major banks, I still think there are more attractive opportunities elsewhere on the ASX.
