The Westpac Banking Corp (ASX: WBC) share price is down over 5% since the start of the year. However, this has had the pleasing effect of boosting the dividend yield.
After all, the best reason to buy any of the big four banks including Commonwealth Bank of Australia (ASX: CBA), National Australia Bank Ltd (ASX: NAB) and Australia and New Zealand Banking Group (ASX: ANZ) is for the yield.
Is the yield worth the risk to invest in Westpac shares?
The current Westpac grossed-up dividend yield is around 9.1%. That is far better than the bank interest rate you can get in any of its bank accounts, term deposits or subsidiaries.
The subsidiaries have been a good contributor to Westpac's growth. Bank of Melbourne, RAMS and St George Bank all play their part in Westpac's multi-brand approach.
Its performance has been driven by Australia's housing market. It seems to be the Australian dream to own a house, or perhaps an investment property.
House price growth led to credit growth, which led to house price growth and so on. Things aren't looking so healthy any more. House prices are now falling and this is likely to lead to a large slowdown in credit growth, perhaps even leading to credit declines.
Banks have rightly been put under the spotlight in the Royal Commission for their behaviour. Borrowers are now facing much more stringent tests to borrow less money than before. The Royal Commission hasn't even made any official recommendations yet. If only the same borrower tests had been applied throughout the last six years.
Things might get worse before they get better for Westpac and others. Household debt is at an all-time high, yet interest rates are at an all-time low. This has caused complacency for households, banks, regulators and the government.
Interest rates are rising around the world and this is having an effect on local interest rates, despite the RBA just sitting there and not budging. I believe the RBA shouldn't have reduced the rate so low, as it just encouraged more borrowing.
If bad debts rise this will obviously have a bad impact on bank's profitability. Bad debts are at cyclical lows, they won't stay this low for long. Indeed, customer arrears are starting to rise. If forced house sales start occurring then Westpac could see more share price declines.
Foolish takeaway
I believe Westpac is better than some of its banking peers. However, I'm personally giving the whole banking industry a wide berth because the growth prospects are very limited for the next few years. There's a lot of downside and not much upside despite it trading at only 12x FY19's estimated earnings.
Investors buying Westpac today for the medium-term could get a good dividend and suffer even bigger capital falls.
