The Westpac Banking Corp (ASX: WBC) share price will be on watch today after announcing a change to its mortgage lending.
Westpac Banking Corporation, more commonly known as Westpac, is one of Australia’s ‘Big Four’ banks and a financial-services provider headquartered in Sydney. It is one of Australia’s largest lenders to homeowners, investors, individuals (via credit cards and personal loans) and business. Its name is a portmanteau of “Western” and “Pacific”.
Westpac Has Changed Its Lending
The big four ASX bank is reducing its mortgage serviceability buffer from 5.75% to 5.35% according to the Australian Financial Review.
This will affect all of Westpac’s bank brands including ones like St George and BankSA, and will come into effect at the end September 2019.
Westpac’s buffer tests to see whether a potential borrower could afford the loan if the interest rate was at a higher level. It used to be set at 7% until APRA decided to lower the rate to reflect the lower interest world we live in.
The major bank doesn’t think it will lead to a big increase in the loan volumes, but it hopes to offset the impact of the updated household expenditure measure (HEM) data.
HEM was criticised for being too unrealistic with how low it estimated borrower expenses.
According to the AFR, the Commonwealth Bank of Australia (ASX: CBA) floor is 5.75%, the Australia and New Zealand Banking Group (ASX: ANZ) floor is 5.75% and the National Australia Bank Ltd (ASX: NAB) floor was the lowest at 5.5%.
Westpac’s new floor is seen as a way to be the lowest of the big four banks and undercut them.
Is The Westpac Share Price A Buy?
This isn’t changing the actual interest rate borrowers get, just the theoretical interest rate the bank thinks the borrower could pay if rates were higher.
So the move may boost profit and its market share compared to the other big banks, but it would suggest the bank is taking on slightly more risky customers. Mortgage rates are unlikely to start with a 4% any time soon, so above 5% is still a good buffer.
Westpac offers a fully franked dividend yield of 6%, but some analysts think that the dividend may be cut by 10% over the next year.
For reliable dividends and profit growth I’d rather go for the shares in the free report below instead.
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