Is the Westpac Banking Corp (ASX:WBC) share price a buy? The bank has been rising in October 2020, is it worth buying for your portfolio?
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Is the Westpac Banking Corp (ASX: WBC) share price a buy right now?
Since 2 October 2020, the Westpac share price has gone up by around 10%. That’s a good amount of growth in a short amount of time.
But because Westpac is a fairly slow growth business due to its size and industry, you need to make sure you buy it at the right price, particularly because of the ongoing COVID-19 difficulties right now.
What has Westpac announced recently?
In the FY20 half-year result it reported that statutory net profit was down 62% to $1.19 billion and cash earnings was down 70% to $993 million. A big part of this disappointing result was that the impairment charge was $2.24 billion, up from $1.9 billion largely because of COVID-19.
In the third quarter of FY20 it reported another impairment charge of $826 million, resulting in statutory earnings for the quarter of $1.12 billion and cash earnings of $1.32 billion.
The bank’s balance sheet was still in a strong position at the end of the third quarter with a CET1 capital ratio of 10.8%. However, part of the reason for the bank’s balance sheet strength was because the board decided not to pay a dividend.
The other big ASX banks of Commonwealth Bank of Australia (ASX: CBA), National Australia Bank Ltd (ASX: NAB) and Australia and New Zealand Banking Group (ASX: ANZ) have all paid at least one dividend in 2020.
One of most disappointing things about the third quarter update was that Westpac said its net interest margin (NIM) fell by 8 basis points to 2.05% (excluding notable items). Westpac said it was driven downwards by lower rates.
The problem is that Westpac is quite dependent on a good margin for its loans for generating profit, particularly after divesting some non-core assets, and it continues to look at other subsidiaries that it could sell.
The NIM tells investors how much profit the bank is making from the loans it gives out compared to the cost of funding for the bank.
Is the Westpac share price a buy?
Westpac is one of the biggest banks in Australia, I have no doubt it will get through this difficult period.
However, there could be elevated levels of bad debts for Westpac in 2021, perhaps for a few years. This is despite the official interest rate being almost 0%.
In terms of potential growth of the Westpac share price, I don’t think that it can rise much more whilst underlying profit growth remains difficult.
Westpac may return to paying a dividend in 2021, but I don’t think it’s going to be as good as 2018. Therefore, I don’t think Westpac is a good option for total returns over the next couple of years at the current Westpac share price.
I believe there are plenty of other ASX shares that I’d buy first.
Getting more diversification could be option, so simply buying an exchange-traded fund (ETFs) which includes Westpac may be a smart move like Vanguard Australian Shares Index ETF (ASX: VAS) and BetaShares Australia 200 ETF (ASX: A200).
Listed investment companies (LIC) that own Westpac shares could also be better ideas like WAM Leaders Ltd (ASX: WLE) and Australian United Investment Company Ltd (ASX: AUI).
There are other dividend-paying ASX shares that could be solid long-term buys today including: Brickworks Limited (ASX: BKW), Rural Funds Group (ASX: RFF), Pacific Current Group Ltd (ASX: PAC) and Magellan Financial Group Ltd (ASX: MFG).
I believe all of the above ideas can generate stronger total returns and pay more reliable dividends than Westpac.
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Returns As of 6th October 2020
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Motley Fool contributor Tristan Harrison owns shares of RURALFUNDS STAPLED. The Motley Fool Australia owns shares of and has recommended Brickworks and RURALFUNDS STAPLED. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.