Is the pullback in Westpac shares a buying opportunity?

Westpac's dividend attracts investors, but fierce competition complicates the buy case.

| More on:

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

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.

A male investor wearing a white shirt and blue suit jacket sits at his desk looking at his laptop with his hands to his chin, waiting in anticipation.

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.

Motley Fool contributor Marc Van Dinther has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

More on Bank Shares

Happy young woman saving money in a piggy bank.
Bank Shares

How much do I need to invest in CBA shares for $10,000 of passive income?

Looking for passive income? Here's how you could do it with the banking giant's shares.

Read more »

View of a business man's hand passing a $100 note to another with a bank in the background.
Bank Shares

$10,000 invested in Westpac and NAB shares 3 years ago is now worth…

Here’s how the returns from NAB and Westpac shares stack up over the past three years.

Read more »

A pink piggybank sits in a pile of autumn leaves.
Bank Shares

All 4 big banks now expect a rate hike. What does this mean for ASX bank shares?

Higher rates are not the win they sound like.

Read more »

Different coloured piggy banks on different coloured squares.
Bank Shares

How many ANZ shares do you need for $8000 of passive income?

The franking credits do a lot of work here.

Read more »

Calculator on top of Australian 4100 notes and next to Australian gold coins.
Bank Shares

Are NAB, ANZ, Westpac and CBA shares attractive buys right now?

Should investors look at banks as opportunities?

Read more »

A man thinks very carefully about his money and investments.
Bank Shares

By September 2027, ANZ shares could turn $10,000 into…

Can investors bank on good returns with ANZ?

Read more »

A bland looking man in a brown suit opens his jacket to reveal a red and gold superhero dollar symbol on his chest.
Bank Shares

How many Westpac shares do I need to buy for $8,000 of passive income?

Can investors get excited about Westpac shares for dividends?

Read more »

A woman in a bright yellow jumper looks happily at her yellow piggy bank.
Bank Shares

If I invest $15,000 in CBA shares, how much passive income will I receive in 2027?

How much dividend cash can investors bank on next year?

Read more »