Asia exit: Are Westpac (ASX:WBC) shares a buy yet?

Westpac Banking Corp (ASX: WBC) has announced it’s exiting many parts of Asia. Are Westpac shares a buy yet?

Asia Exit

The big ASX bank announced that it has decided to “consolidate its international operations” into three branches after a review of its Asia, Europe and US businesses. Those remaining three branches will be: Singapore, London and New York.

That means that Westpac is going to exit operations in Beijing, Shanghai, Hong Kong, Mumbai and Jakarta.

Acting Westpac Institutional Bank (WIB) Chief Executive Curt Zuber said: “Westpac’s priority is to focus on its core Australian and New Zealand customers and to support them in areas where we have scale and capability. 

For WIB, the change will enable us to deliver products and services to customers more efficiently. Our ambition is to be the leading Australian and New Zealand-focused institutional bank for customers while delivering sustainable returns.”

These changes are not expected to have significant impact on cash earnings. Westpac plans that, over time, it will improve the bank’s capital efficiency, including reducing risk-weighted assets by over $5 billion.

Are Westpac shares a buy?

The Westpac share price is still down by 28% from the pre COVID-19 price. So investors still aren’t as confident about Westpac’s profit prospects as they were at the start of the year.

One of the main difficulties for the bank is that Westpac’s ability to make net interest profit is reducing because of the really low interest rates. Westpac achieved a net interest margin (NIM) of 2.05% for the June 2020 quarter, down from 2.13% in the FY20 first half. It largely fell because of the ultra low interest rate. Whilst loans and savings accounts can mostly be adjusted to reflect the lower rate, other products like transaction accounts aren’t – so Westpac’s margin reduces as the official rate goes lower.

Another issue that investors have to contend with is that Westpac has to pay a $1.3 billion fine for its failure about reporting suspicious international transactions to the authorities. That’s a big hit to profit whilst all of the COVID-19 troubles are going on. Westpac announced a an impairment charge of $826 million in the June 2020 quarter, though this was actually less than the previous quarter.

I do believe there’s short term potential for the Westpac share price to go a bit higher as Australia’s economy further recovers. But I’m not sure about the longer term. Interest rates are expected to stay low for at least a few years, which could hamper profit during that time. Competition for quality borrowers is intense, with very cheap bank loans.

The big banks have a strong market position, I don’t think Bank of Queensland Limited (ASX: BOQ) or Suncorp Group Ltd (ASX: SUN) is suddenly going to become a borrower’s preferred bank.

Westpac is already a huge business. I can’t see turning generating consistently strong shareholder returns over the next few years. Banks could be buys in a rising interest environment. But the current low interest rate, and rising bad debts, make me believe there are plenty of other ASX dividend shares I’d buy first. For starters, I’d be much happier to buy more shares of Washington H. Soul Pattinson and Co. Ltd (ASX: SOL) which I covered here. Its leadership has recently been buying shares.

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At the time of publishing, Jaz owns shares of WHSP.

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