Westpac Banking Corp (ASX: WBC) shares have endured a difficult year, falling around 9% over the past 12 months. At $34.39, the $117 billion banking giant is trading near its 52-week low.
That decline has made Westpac's valuation look more tempting. But with several challenges weighing on the banking sector, is the weakness an opportunity to buy — or a warning sign?
Let's see what the market experts think.
Image source: Getty Images
Why Westpac shares are under pressure
August was another challenging month for ASX bank shares as renewed concerns about inflation and interest rates weighed on investor sentiment.
Westpac shares are also facing several company-specific headwinds. Mortgage demand is softening, competition for borrowers remains intense, the housing market is facing uncertainty and pressure on lending margins could weigh on profitability.
That doesn't make Westpac a bad bank, however. The lender has millions of customers, a substantial deposit base and one of Australia's largest mortgage businesses. It is also investing in technology and expanding its capabilities in areas such as business banking.
Its latest quarterly result was reasonably encouraging. Westpac delivered $1.8 billion in net profit excluding notable items, representing a 2% increase compared with the average quarterly profit in the first half. Its net interest margin also remained steady at 1.89%.
Mortgage competition puts pressure on margins
However, there were some less encouraging developments beneath the headline numbers.
Mortgage application volumes declined as competition intensified and borrowers remained cautious amid interest-rate uncertainty. Westpac has also warned that margins could come under further pressure in the near term.
For a major bank whose earnings are closely tied to lending margins, that's an important risk for investors in Westpac shares to consider.
What do brokers think?
The broker consensus doesn't exactly suggest Westpac shares are a screaming buy.
According to TradingView data, nine of 16 brokers rate the stock a sell or strong sell. Six have a hold recommendation, while just one has a strong buy rating.
The average price target is $33.38, below the current share price of $34.39.
There is still a wide range of views. The most bullish forecast is $45, implying potential upside of around 31%, while the most pessimistic target suggests the shares could fall another 17% over the next 12 months.
Foolish takeaway
The lower valuation of Westpac shares, compared to Commonwealth Bank of Australia (ASX: CBA) and dividend appeal could make the shares worth considering for income-focused investors willing to accept some near-term uncertainty.
But a cheaper share price doesn't automatically make a stock a bargain.
With mortgage competition intensifying and margins facing further pressure, the case for buying the dip in Westpac shares isn't quite as compelling as the recent weakness might suggest.
