Is the Westpac Banking Corp (ASX: WBC) share price a buy with the major ASX bank trading at under $16?
Like most ASX banks, Westpac's share price has been crunched because of the coronavirus. It's down 39% since the February high (and it's down 46% over the past six months).
Today's ABS news that the Australian unemployment rate only fell by 0.1% to 5.2% is a decent start, though it's obvious that the worst is yet to come.
A key part of Westpac's success this year will be how many borrowers can continue to pay their loans on time. The payment holiday will help troubled borrowers. The jobkeeper scheme will help people during this period. But Westpac is still likely to see a sharp rise in provisions and bad debts.
What about Westpac's other provisions?
The major ASX bank recently outlined a number of provisions and write-downs amounting to $1.43 billion after tax.
The biggest part of this was a $1.03 billion after tax provision relating to AUSTRAC. It also increased its provision for customer refunds, repayments and litigation by $260 million after tax.
These two items are big profit drains just when banks need to be holding onto cash as much as possible.
So is the Westpac share price a buy?
I think income-seekers wanting dividends this year need to be looking elsewhere. The banks are going to do some painful dividend cuts, though the FY22 dividend could be strong.
If interest rates are going to stay low for many years it's obvious that bank profitability will be lower.
Westpac does look cheap. But it's cheap for a reason. I'm cautious about investing today due to the fact that we don't know how long and painful the economic effects will be. If this is going to be worse than the GFC then I don't the Westpac share price quite reflects that right now.
It's almost impossible to estimate what the earnings will be in FY20 or even in FY21. That's why I'd rather go for smaller shares where it's easier to get a handle on the valuation than Westpac.
