Is this the right time to invest in Westpac shares after the interest rate cut?

The Westpac Banking Corp (ASX: WBC) share price has been impacted by changes in the local and global economy in the past 12 months. We're always looking for opportunities, so it's worthwhile considering ASX bank shares like Westpac.

Investors may be surprised to see on the chart above that the Westpac share price has fallen 2.8% this year, at the time of writing.

Aussies may think that banks could be significant opportunities as rate cuts occur, but I think there's more to it than that.

I'll share both positives and negatives about recent (and future) RBA rate cuts for the bank.

Positives

A key benefit for Westpac shares is the fact that it takes a bit of the pressure off borrowers. High interest rates by the RBA were trying to take out some of the demand of the Australian economy. And it worked.

Some borrowers struggled with the high rates and this led to rising arrears for banks and larger credit provisions, reducing profit. A reduction of the interest rate should help improve the arrears and losses of Westpac's loan book. Time will tell how much of a difference the two rate cuts this year helps.

Shane Oliver, AMP Capital chief economist, expects the RBA to cut interest rates again in August 2025, November 2025 and February 2026, according to reporting by ABC. So, the improvements for borrower finances could get better.

Another positive for Westpac is that it could increase demand for credit in Australia, which may boost lending volumes.

Finally, investors may be more willing to pay a higher price/earnings (P/E) ratio for Westpac shares in the future with the RBA interest rate lower (with further reductions expected).

Negatives

There are plenty of positives, but it's not all good for the bank.

I think Westpac's net interest margin (NIM) is going to come under pressure. The higher interest rate environment helped ASX bank shares like Westpac generate higher earnings on transaction account balances which paid little-to-no interest. The bank could lend that money out at a very good rate.

With loan rates coming down, that free 'hit' for banks is reducing and could be a sizeable headwind for NIM.

I'm also going to keep an eye on whether the lending environment becomes more competitive. Lower rates could make it easier for smaller lenders to compete who don't need retail deposits to get their funding.

Overall, I think things are looking more positive for Westpac shares, but its NIM is likely to be challenged. I believe the banks aren't the most appealing investment around, but lending growth could help offset some of the downsides to the RBA interest rate cut.

The post Is this the right time to invest in Westpac shares after the interest rate cut? appeared first on The Motley Fool Australia.

Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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