Is the Westpac share price a buy? Here's my view

This is what I'm focused on with this ASX bank share.

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Over the past 12 months, the Westpac Banking Corp (ASX: WBC) share price has climbed more than 50%, as shown in the chart below. The banking giant has been one of the market's best-performing S&P/ASX 20 (ASX: XTL) shares.

Created with Highcharts 11.4.3Westpac Banking Corporation PriceZoom1M3M6MYTD1Y5Y10YALL27 Oct 202327 Oct 2024Zoom ▾Nov '23Jan '24Mar '24May '24Jul '24Sep '24Jan '24Jan '24Apr '24Apr '24Jul '24Jul '24Oct '24Oct '24www.fool.com.au

It's very rare for an ASX share as large as Westpac to rise as strongly as it has over just one year.

Some excited investors will be hoping it can keep rising, while more cautious investors may wonder if the ASX bank share has reached a peak.

We'd need a crystal ball to truly know what will happen next, but here are a few thoughts on the situation.

Rising profit

One of the most important factors in justifying a share price rise is increasing profit. Westpac's latest update to the market was the quarterly update for the three months ending 30 June 2024.

In that update, the ASX bank share said it made a net profit of $1.8 billion. This was up 6% on the quarterly average compared to the first half of FY24, or 2% up excluding 'notable items'.

Does a 6% rise in profit justify an increase of more than 50% in the Westpac share price? I'm not sure it does because that divergence leads to an increase in the price/earnings (P/E) ratio, making a business appear more expensive because investors are paying more for the same amount of earnings.

According to the broker UBS, Westpac is projected to have generated earnings per share (EPS) of $1.87 in the 2024 financial year, which would put the P/E ratio for FY24 at 17x. The FY24 result is due to be announced on 4 November 2024.

Using Commsec data and ignoring FY20, which was impacted by COVID, the FY21 average annual P/E ratio of 14 was the highest in the period between FY15 to FY23. So, trading at 17x seems expensive.

Price-to-book ratio

One way to value banks is to compare their market value to their balance sheet value, which is called the price-to-book (P/B) ratio. And a good time to buy an ASX bank share is typically when the P/B ratio is 1 or less.

Just under 18 months ago, I suggested the Westpac share price was cheap because it was trading at a P/B ratio of approximately 1. Since then, the Westpac share price has risen by more than 50%.

According to UBS, the Westpac price to book ratio for FY24 is now at approximately 1.5x.

My 2 cents

It appears the Westpac share price has soared not due to a profit boost or increase in the balance sheet value but simply because investors are willing to pay more for the ASX bank share.

This is why I think it has become less attractive. The prospective dividend yield has reduced (due to the higher valuation) and the earnings outlook remains challenging with elevated competition and rising arrears for borrowers.

Westpac has done well for long-term shareholders, but I wouldn't want to buy new shares in the bank at the current level.

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.

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