Given current market conditions, what would be the better buy between Commonwealth Bank of Australia (ASX: CBA) shares or Westpac Banking Corp (ASX: WBC) shares?
About Westpac and CBA
Commonwealth Bank of Australia, or CBA, is Australia’s largest bank, with commanding market share of the mortgages (24%), credit cards (27%) and personal lending markets. It has 16.1 million customers, of which 14.1 million are in Australia. It is entrenched in the Australian payments ecosystem and financial marketplace.
Westpac is another of Australia’s ‘Big Four’ banks and a financial-services provider headquartered in Sydney. Alongside CBA, Westpac is a leading lender to homeowners, investors, individuals (via credit cards and personal loans) and businesses.
Past Performance
Past performance is not a reliable indicator of future performance, but it could be worth considering for this case.
Over the last 12 months, CBA shares have returned 10.7% while Westpac shares have fallen 2.3%. While this could be due to a multitude of reasons, it does suggest that CBA was impacted less by the Royal Commission than Westpac. CBA’s growth has also been stronger over a six-month period, suggesting that CBA has better potential to recover from setbacks.
Housing
This argument could swing either way. CBA is Australia’s largest mortgage lender, so it is most heavily exposed to negative movements in the property market. While there is a concern that property prices are going to continue falling, some recent changes could turn things around.
APRA regulation changes, possible RBA rate cuts and new government incentives for first home buyers could push property prices higher and increase borrowing, which would be a big bonus for CBA.
Tech Spending
As this Rask Media article points out, technology spending is becoming increasingly important for the big banks to keep pace with smaller technology disruptors.
In 2018, Westpac’s technology expenses were more than $2.1 billion, while CBA fell just short of $1.8 billion. As long as this money is used efficiently, that’s a tick to Westpac. However, Westpac is also the only one of the big four banks that doesn’t offer Apple Pay, so it’s questionable to say that they adopt new technologies faster.
Dividends
Westpac wins this one convincingly with a fully franked dividend yield of 6.75% compared to CBA’s dividend yield of 5.52%. While this is an important figure, the stability of dividends should also be considered. All of the big banks are facing increasing pressure on margins right now and National Australia Bank Ltd (ASX: NAB) has already cut dividends so it wouldn’t be surprising to see Westpac or CBA do the same.
Summary
CBA appears to be the safer of the two options and has made a better return over the last 12 months. However, if the property market crashes both banks would be hit hard.
Westpac’s higher dividend yield may be the payoff for accepting a riskier investment. At the end of the day, it might be better just to buy both — or wait for a lower price — rather than try to pick one over the other.
If you’re looking for other (better) share ideas in 2019, the free investing report below reveals other high-quality, dividend-paying ASX companies.
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Disclosure: At the time of writing, Max does not own shares in any of the companies mentioned.