Westpac Banking Corp (ASX: WBC) offers one of the best dividend yields on the ASX, but with all the risks it faces is it time to sell and move on?
About Westpac
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 businesses.
Big Risks For Westpac
Looking at Westpac’s loan portfolio, the standout risk appears to be mortgage lending. In 1H19, Westpac held total loans of $714 billion with 69% of that going to housing.
Of those home loans, around 39.1% are loans for investment properties and around 30.6% are interest-only loans. Interest-only loans tend to be discussed a lot because they are generally more high-risk for banks and for borrowers.
If you’re interested in property, the video below explains the term “investment grade”.
However, something more concerning than the number of interest-only loans is the rising number of delinquencies. In 1H19, Westpac reported that 30+ day delinquencies on mortgages had grown 13.57% to 159 basis points, while 90+ day delinquencies were up 13.88%.
If delinquencies continue to grow, this could begin to seriously impact Westpac’s profitability because home loans are such a large aspect of its portfolio.
Besides these home loan risks, Westpac is also just experiencing slow (or negative) growth.
In 1H19, reported net profit fell 24% compared to 1H18, while cash earnings were down 22%. Return on equity also declined by 353 basis points, reflecting a decline in Westpac’s ability to profitably deploy its equity.
What About The Dividend Yield?
While Westpac does have an attractive dividend yield, around 6.6% fully-franked, the above risks could begin to impact this dividend and lead to a cut, like we saw earlier this year from National Australia Bank Ltd (ASX: NAB).
In fact, Westpac has failed to increase its dividend since 2016 and has only managed to maintain it each year. I’d prefer to be investing in a company that can consistently grow its dividend.
My Take
Westpac’s dividend yield looks nice but the high exposure to mortgages and a rising delinquency rate are a concern. Combined with this is the three rate cuts we’ve seen this year from the Reserve Bank of Australia, which is beginning to impact all of the banks’ net interest margins (NIM).
To be clear, this isn’t just about Westpac. Most of the other big banks like Commonwealth Bank (ASX: CBA) and Australia and New Zealand Banking Group (ASX: ANZ) have these same issues that look to be limiting long-term growth potential.
At this time, I’d rather be investing in the proven, dividend-paying companies in the free report below.
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Disclosure: At the time of writing, Max does not have a financial interest in any of the companies mentioned.
