Shortly before the ASX's close today, more than $92 million worth of Westpac Banking Corp (ASX: WBC) shares had been traded.
However, surprisingly, the bank's share price traded modestly flat despite APRA's earlier decision to change the way Westpac and its peers, must account for risk in their mortgage portfolio.
Is Westpac a safe dividend stock?
Westpac has proven to be an excellent dividend stock over the past 24 years of recession-less Australia. Indeed, in just ten years, Westpac's payout has risen 82%.
However, in the post-Global Financial Crisis world, Westpac is increasingly exposed to regulatory risk. That is, the risk of changing regulation is threatening the profitability of the bank.
Of course, Westpac is still a very profitable lender, but sooner or later its falling margins, worsening economic outlook, and increased regulation will hinder its profit and dividend growth.
Throw in Westpac's heavy exposure to Australia's heated property market, and you might want to reconsider its status as a safe and reliable dividend stock to hold over the next five years.
Indeed, APRA's requirement to hold more capital comes at a time when many big banks are already arguably past their growth sweet spot.
This is important to dividend investors because a bank's ability to generate outsized returns ultimately comes down to its ability to grow its loan book.
For example, although Westpac's profitability has fallen over the past decade (evident from its falling Net Interest Margin above), its loan portfolio has grown 183%.
But with record-high household debt levels and a slowing mining sector its little wonder Westpac CEO, Brian Hartzer, recently forecast credit growth to be just "modest but positive".
Is it a worthy dividend stock?
Given that Westpac is forecast to pay a dividend equivalent to 5.4%, it has appeal. However, its shares are not cheap at a time when lower growth and increased regulation are expected. Therefore, my advice is to avoid buying Westpac shares, for now.
