CBA vs Westpac shares: Which is the best buy?

Commonwealth Bank of Australia (ASX: CBA) and Westpac Banking Corp (ASX: WBC) are two of Australia’s biggest banks.

Both offer exposure to the Australian economy, home lending, deposits, business banking, and dividends.

But if I were choosing between them today, which one would I buy?

Why CBA shares stand out

CBA remains my preferred Australian bank because I think it has the strongest overall franchise.

Its enormous customer base gives it relationships across everyday banking, mortgages, business banking, credit cards, payments, and investing.

I particularly like the way CBA has invested in technology around those customers.

The CommBank app has become an important part of how millions of Australians manage their finances, and the bank continues adding services that can make customers more likely to stay within its ecosystem.

That technology investment can also help CBA operate more efficiently, make decisions faster, and improve areas such as fraud detection and customer service.

Business banking gives me another reason to be positive.

CBA has built a substantial position with Australian businesses, giving it another avenue for growth alongside its dominant retail banking operations. Business customers can use the bank for lending, deposits, payments, and other services as their companies develop.

For me, CBA has several strong parts of the business working together, and I think that makes it a high-quality long-term holding.

What about Westpac shares?

Westpac is certainly not a bad bank.

It has millions of customers, a huge deposit base, and one of Australia’s largest mortgage businesses. It is also investing to improve its technology and strengthen areas such as business banking.

The shares also trade on a lower price-to-earnings ratio than CBA and offer a higher dividend yield.

That could make Westpac more attractive to investors who place greater weight on income or who want to pay a lower multiple for a major bank.

My hesitation comes from the growth outlook. I remain concerned about Westpac’s heavy exposure to Australian housing at a time when home lending growth could become more difficult. Recent weakness in mortgage applications has reinforced that concern for me.

The bank is working to expand elsewhere, particularly in business banking, but I would like to see more progress before becoming more positive.

A cheaper valuation can certainly improve the investment case. I still want to feel confident that the underlying business has enough ways to grow over the years ahead.

Are CBA shares worth paying more for?

CBA shares normally command a substantial premium over Westpac shares, and investors need to decide whether the quality of the business justifies paying more.

I think it does. I would rather pay a higher price for the bank I believe has the stronger customer franchise, better technology, and more attractive long-term growth opportunities.

Of course, CBA still needs to execute well. A premium valuation leaves less room for disappointment, and banking conditions can change quickly.

But when I am investing with a long holding period, I tend to put more weight on the quality of the business than simply choosing whichever share looks cheaper.

Foolish takeaway

If I had to choose between CBA and Westpac shares today, I would buy CBA.

Westpac offers a lower valuation and stronger prospective income, which may suit some investors.

For me, though, CBA’s customer relationships, technology, and business banking position give it the stronger long-term investment case.

The post CBA vs Westpac shares: Which is the best buy? appeared first on The Motley Fool Australia.

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Motley Fool contributor Grace Alvino has positions in Commonwealth Bank Of Australia. 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.