Westpac Banking Corp (ASX: WBC) shares have been under pressure, falling around 9% over the past 12 months. At the current share price of $34.91, the $117 billion ASX bank stock is trading close to its 52-week low.
The pullback has made the valuation more appealing, but is it enough to make Westpac shares a buy? Let's see what the experts think.
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Solid financial results, but…
Westpac is certainly not a bad bank. It has millions of customers, a huge deposit base, and is one of Australia's largest mortgage businesses. It is also investing in improving its technology and strengthening areas such as business banking.
The latest quarterly profit itself was reasonably solid. Westpac shares 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%.
However, there are some warning signs beneath the surface. Mortgage application volumes declined as competition intensified and borrowers continued to navigate interest-rate uncertainty. 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.
Westpac's investor presentation showed mortgage applications slowing noticeably. Average monthly applications were around 29,000 during the third quarter, with the post-budget run rate dropping further to approximately 26,000.
That's important because home lending is a huge part of Westpac's business.
Concerns about the growth outlook
There is an upside for investors, though. Westpac shares trade at a lower price-to-earnings ratio than Commonwealth Bank of Australia (ASX: CBA) and offer a higher dividend yield. That could appeal to investors who prioritise income or want to pay a lower multiple for a major Australian bank.
The market's hesitation appears to centre on the growth outlook. The key question 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 watching consumer spending, credit risks and regulatory changes closely.
What do analysts think?
TradingView data shows nine of 16 brokers rate Westpac shares as sell or strong sell, while six have a hold rating and just one has a strong buy rating. The average price target is $33.38, below the current share price.
The team at Red Leaf recently named Westpac shares as a sell. It highlights the increasingly competitive environment as a reason for caution, particularly given Westpac's valuation. Red Leaf commented:
The bank remains well capitalised and continues to generate solid earnings, but the operating environment is becoming increasingly competitive. Mortgage pricing is aggressive, deposit competition remains intense and the scope for sustained margin expansion appears limited. Westpac's dividend remains attractive, but investors should also consider opportunity cost. We believe there are more compelling opportunities on the ASX, which offer stronger structural growth or more attractive valuations.
Foolish takeaway
For income-focused investors, Westpac's dividend and lower valuation could make the recent weakness in the share price interesting.
But with mortgage competition intensifying and margins under pressure, the case for buying the dip isn't quite as clear-cut as the cheaper share price might suggest.
