What's the outlook for the Westpac share price in August?

One fund manager has outlined some of the problems facing the banking sector.

| More on:
A man holds his hand under his chin as he concentrates on his laptop screen and reads about the ANZ share price

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Key points

  • Fund manager Martin Currie has done some analysis on the banking industry
  • In the longer term, banks may achieve lower margins than many are expecting
  • Higher interest rates could still hurt household credit access and demand

The Westpac Banking Corp (ASX: WBC) share price has been on a decent run over the last few weeks. With a lot of businesses reporting in August, including a few ASX bank shares, it could be an interesting time for one of the biggest lenders in the country.

There has been a lot of talk about how much profit banks might be able to generate in this competitive environment where interest rates are now much higher than before.

Investment outfit Martin Currie has done some analysis on the banking sector and made some commentary about how things are looking.

Margins to struggle?

Chief investment officer Reece Birtles and portfolio manager Matthew Davison said that its analysis indicates that as funding costs normalise to "pre-low rate era levels", the large mortgage discounts that all banks have offered customers "will come home to boost".

The Martin Currie fund managers said that deposit margins are now a headwind, so the only way for ASX bank shares to repair their net interest margins (NIMs) will be to limit the pass-on benefits to customers when the rate-cutting cycle starts.

If higher-than-desired inflation sticks around, Birtles and Davison suggested that it could take a while for banks to implement that strategy, which increases the risk of "lower NIMs persisting".

The fund managers believe that lower NIMs will lead to reduced revenues, which they suggest will be "even lower than the consensus estimates for the next three to five years."

Lower revenue will then mean that cash earnings aren't as good as Martin Currie was initially expecting, and what the consensus of market analysts thinks.

All of that doesn't sound good for the Westpac share price, considering profit is a key factor for valuations.

Reduced credit demand

While the margin may be troubled, the fund managers suggested that after the huge level of household savings during the COVID-19 years, savings rates have "normalised", and people are "increasingly using their savings to cover their growing mortgage and essential living costs."

Rising interest payments "pose risks" broadly to household consumption expenditure and may limit household demand for more debt.

Caution about house prices

The Martin Currie investment managers suggested that the current conditions have "set the backdrop for a potentially sharp correction in the supply of credit for housing."

They suggested that there are risks for people accessing and servicing debt to purchase property, which could mean a "substantial decline" in credit availability "translating to lower prices."

The fund managers noted that a lack of housing stock and immigration has supported prices recently, but the ongoing higher inflation and easing loan approvals "all point to the potential for a deeper correction in house prices, further contributing to the revenue squeeze for banks."

Westpac share price valuation

Using the forecasts on Commsec, Westpac shares are valued at under 11 times FY23's estimated earnings, which may be cheap, but the fund manager outfit Martin Currie is seemingly not a fan.

Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

More on Bank Shares

Contented looking man leans back in his chair at his desk and smiles.
Bank Shares

Major CBA investor reveals why he's all in

This investor described one major reason driving his investment in CBA shares.

Read more »

Young investor sits at desk looking happy after discovering Westpac's dividend reinvestment plan
Bank Shares

Invested $10,000 in Westpac shares 2 years ago? Guess how much you've already banked!

Atop their regular dividend payments, Westpac shares have enjoyed a strong two-year run.

Read more »

Woman calculating dividends on calculator and working on a laptop.
Bank Shares

Buying CBA stock today? Here's the dividend yield you'll get

CBA's yield right now might surprise you.

Read more »

A financial expert or broker looks worried as he checks out a graph showing market volatility.
Bank Shares

How much would the ASX 200 fall if CBA shares returned to 'fair value'?

CBA shares account for 12% of the ASX 200.

Read more »

A woman sits in a cafe wearing a polka dotted shirt and holding a latte in one hand while reading something on a laptop that is sitting on the table in front of her
Dividend Investing

How are these passive income investors earning a 7.5% dividend yield on their surging CBA shares?

CBA shares are proving more lucrative for some passive income investors than others.

Read more »

A woman in a bright yellow jumper looks happily at her yellow piggy bank.
Bank Shares

$10,000 invested in CBA shares in FY25 is now

Let's see whether it was a successful 12 months for bank investors in the last financial year.

Read more »

Woman with spyglass looking toward ocean at sunset.
Bank Shares

What could happen to the big 4 banks in FY26?

What’s in store for the big four banks over the next 12 months?

Read more »

Bank building in a financial district.
Bank Shares

Which is the only ASX 200 bank stock Macquarie expects to outperform in FY 2026?

Macquarie forecasts a tough year ahead for the ASX 200 banks, with only one expected to outperform.

Read more »