Incredibly, Westpac Banking Corp (ASX: WBC) shares have slumped an enormous 23% since their April highs.
Indeed, investors who bought Westpac's expensive shares in April to lock in its forecast 4.8% dividend yield would be bitterly disappointed with the bank's share price performance to date.
However, at these seemingly discounted prices, could Westpac shares be worthy of a spot in your portfolio?
Let's take a quick look.
Valuation
At today's prices, Westpac shares trade on a price-earnings ratio of just 12x. This is in line with its peer group average but compares favourably to the S&P/ASX 200's (ASX: XJO) (Index: ^AXJO) average of 15x.
However, Westpac's price to book value (P/B), which is my favoured ratio for bank shares, is a hefty 1.93x – well above the market's average 1.25x. This suggests investors are willing to pay a premium for the 'assets' on its balance sheet.
It's important to remember, however, that a bank's 'assets' are usually loans to individuals or businesses. The real worth of these assets is a product of their profitability – or lack thereof – and will ebb and flow with the broader economy.
Profitability
Westpac is one of the more profitable big banks having achieved a net interest margin (NIM) of 2.05% in its most recent financial half year. However, its NIM has been falling in recent years. As has the group's return on equity (ROE), which measures the overall profit performance versus shareholder equity.
Westpac's falling ROE isn't entirely its fault mind you. Indeed, higher capital requirements are being imposed on the major banks by the regulator, APRA; with no end in sight. This is making it harder and harder to uphold wide profit margins – to increase safety in the financial system.
Dominance and dividends
Despite the high valuation of shares and falling profit margins there is still a lot to like about holding Westpac shares over the long term. Perhaps the number one feature is Westpac's trailing 5.9% fully franked dividend.
While the dividend may rise or fall in coming years, depending on capital requirements and cyclical factors, Westpac will likely continue paying a decent income to shareholders for many years.
A 25% market share of mortgages and a further 23% of credit cards offer robust exposure to Australia's burgeoning household debt levels.
Buy, hold, or sell?
Westpac shares could be in for a rebound in the short term. However, at today's prices I cannot see much value in the bank's shares and, therefore, I do not believe it is a buy. Given the bank's dominance in the local market and its tasty dividend yield, I'd rate it as a hold.
