The Westpac Banking Corp (ASX: WBC) share price has drifted towards $21. The lower valuation could mean that the ASX bank share is better value.
Since the start of 2023, Westpac shares have declined by 7%, compared to the S&P/ASX 200 Index (ASX: XJO) which has gone up by 4.5% over the same time period.
That's a fair amount of underperformance over a short time period. But, that could also mean that it's a good time to consider the bank if it's at a good price.
First, we'll consider the recent FY23 half-year result because that gave us a lot of insights into its operations.
Earnings recap
The ASX bank share reported that its net profit after tax (NPAT) grew by 22% to $4 billion. That's a lot of profit growth for such a large blue-chip ASX share.
It also declared a fully franked dividend per share of 70 cents, which was up by 15% year over year.
There were two elements that I was very interested to see.
The first was the reduction of operating expenses – Westpac had been targeting cost cuts to improve profitability. Westpac reported that its operating expenses had reduced by 7% to $5 billion. This was due to businesses sold, reduced use of third-party service providers and lower remediation costs. But, it did absorb inflationary pressures on wages and third-party vendor costs.
The other thing that I wanted to see was how much the net interest margin (NIM) had improved amid the higher interest rate environment. Higher lending profit is helpful for Westpac shares. The reported group NIM was 1.96%, up 5 basis points (0.05%) year over year. Westpac's core NIM, which excludes notable items, treasury and markets increased by 20 basis points (0.20%) year over year to 1.90%.
Westpac put the NIM increase down to average interest-earning assets (loans).
The bank remains "well capitalised" with its common equity tier 1 (CET1) ratio of 12.3% being above its target range of 11% to 11.5%. This meant it had $3.6 billion of capital above the top end of the target range.
Time to buy Westpac shares?
The ASX bank share is at a six-month low and getting closer to its 52-week low, as we can see on the chart above.
I think it's quite possible that the FY24 half-year result may not be quite as profitable as the HY23 result with potentially lower lending margins (due to elevated competition) and possibly higher bad debts if the higher interest rate environment is hurting households.
But, I think the Westpac share price valuation now reflects the seemingly-weaker situation with it down 11.6% from 14 February 2023 to today.
The Westpac share price is currently valued at under 11 times FY24's estimated earnings.
Having such a low price/earnings (P/E) ratio also means that the dividend yield is high. Westpac could pay a grossed-up dividend yield of 9.6% in FY23 and 9.75% in FY24.
The low valuation, high dividend yield and strong balance sheet lead me to believe that this is a good time to consider Westpac shares. But, I'd go into the investment not expecting strong capital growth over the medium term because of the competitive environment which could be here to stay, with so many lenders out there.
