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Real Risks You Need To Know Before Investing In Westpac Banking Corporation (ASX:WBC)

Large banks such as Westpac Banking Corporation (ASX:WBC), with a market capitalisation of AU$95.25b, have benefited from improving credit quality as a result of post-GFC recovery, leading to a strong growth environment. Growth stimulates demand for loans and impacts a borrower’s ability to repay which directly affects the level of risk Westpac Banking takes on. With stricter regulations as a consequence of the recession, banks are more conservative in their lending practices, leading to more prudent levels of risky assets on the balance sheet. Since the level of risky assets held by a bank impacts its cash flow and therefore the attractiveness of its stock as an investment, I will take you through three metrics that are insightful proxies for risk.

Check out our latest analysis for Westpac Banking

ASX:WBC Historical Debt September 8th 18
ASX:WBC Historical Debt September 8th 18

What Is An Appropriate Level Of Risk?

By nature, Westpac Banking is exposed to risky assets by lending to borrowers who may not be able to repay their loans. Generally, loans that are “bad” and cannot be recovered by the bank should make up less than 3% of its total loans. When these loans are not repaid, they are written off as expenses which comes directly out of the bank’s profit. The bank’s bad debt only makes up a very small 0.16% to total debt which means means the bank has very strict bad debt management and faces insignificant levels of default.

Does Westpac Banking Understand Its Own Risks?

Westpac Banking’s ability to forecast and provision for its bad loans indicates it has a good understanding of the level of risk it is taking on. If the bank provision covers more than 100% of what it actually writes off, then it is considered sensible and relatively accurate in its provisioning of bad debt. With a bad loan to bad debt ratio of 260.09%, the bank has extremely over-provisioned by 160.09% compared to the industry-average, which illustrates perhaps a too cautious approach to forecasting bad debt.

Is There Enough Safe Form Of Borrowing?

Handing Money Transparent
Handing Money Transparent

Westpac Banking makes money by lending out its various forms of borrowings. Deposits from customers tend to bear the lowest risk given the relatively stable amount available and interest rate. As a rule, a bank is considered less risky if it holds a higher level of deposits. Since Westpac Banking’s total deposit to total liabilities is within the sensible margin at 67.7% compared to other banks’ level of 50%, it shows a prudent level of the bank’s safer form of borrowing and an appropriate level of risk.

Next Steps:

How will WBC’s recent acquisition impact the business going forward? Should you be concerned about the future of WBC and the sustainability of its financial health? I’ve bookmarked WBC’s company page on Simply Wall St to stay informed with changes in outlook and valuation. This is also the source of data for this article. The three main sections I’d recommend you check out are:

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  1. Future Outlook: What are well-informed industry analysts predicting for WBC’s future growth? Take a look at our free research report of analyst consensus for WBC’s outlook.

  2. Valuation: What is WBC worth today? Has the future growth potential already been factored into the price? The intrinsic value infographic in our free research report helps visualize whether WBC is currently mispriced by the market.

  3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.

To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.