MENU

Why Goldman Sachs just put a “buy” rating on Westpac Banking Corp shares

The big banks in Australia such as Commonwealth Bank of Australia (ASX: CBA), National Australia Bank Ltd (ASX: NAB), Australia & New Zealand Banking Group (ASX: ANZ) and Westpac Banking Corp (ASX: WBC) have long been a favourite of SMSF and dividend-seeking investors.

However, if you bought bank shares over the past two years or more you will most likely be underwater or flat on your investment despite the big dividends.

This is because all of the banks have been forced to lift their costs recently thanks to regulatory demands and problems that have forced them to spend more on compliance, after a series of scandals hit the sector.

The fallout from the Hayne Royal Commission is also likely to see ‘credit’ or mortgage lending growth rates fall relative to history as regulators demand tougher standards.

Wholesale funding costs are also reported to have risen across the board for the banks over 2018, which also makes it harder for them to grow profit margins, without passing the costs onto borrowers.

However, according to a November 14 note, analysts at Goldman Sachs believe the 16% fall in Westpac’s share price over just 2018 presents a good buying opportunity for investors.

Here’s why.

After Westpac delivered flat dividends and profits in FY 2018, Goldmans believes it is well placed to manage costs in FY 2019 and is forecasting “a readjustment in the FY19E cost growth outlook to <2% (from 2%-3% previously)” as Westpac itself is on record as seeking to reduce its cost growth trajectory in FY 2019.

Just a small pull back on costs can make a big difference to any bank’s bottom line over the course of a financial year.

Goldmans also reports Westpac in FY 2019 is set to benefit from “its strong/ liquidity funding position developed through 2H18 to manage margin headwinds from mortgage competition”. On top of this, it also sees Westpac as the best placed bank to capitalise on the potential for net interest margin upside over FY 2019. The higher a bank’s net interest margin the greater its profitability.

Finally, the analysts claim Westpac’s current valuation is “cheap” relative to 15-year averages on a 12 month forward PE of 12x and greater than 7% dividend yield.

Its 12-month price target for Westpac is $32.82.

Accepting this analysis it appears Westpac shares are good value, but investors should be aware that if Westpac is forced to cut its dividends on the back of a tough housing and regulatory environment then Goldmans’ analysis could be way off the mark.

OUR #1 dividend pick to grow your wealth now is revealed for FREE here!

You might not know this market leader's name, but it's rapidly expanding into a highly profitable niche market here in Australia. Even better, the shares boast a strong, fully franked dividend that should balloon in the years to come. In other words, we're looking at the holy grail of incredible long-term growth potential AND income you can watch accruing in your account in real time!

Simply click here to grab your FREE copy of this up-to-the-minute research report on our #1 dividend share recommendation now.

Motley Fool contributor Yulia Mosaleva owns shares of Commonwealth Bank of Australia. The Motley Fool Australia owns shares of National Australia Bank Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

The 5 mining stocks we’re recommending in 2019…

For decades, Australian mining companies have minted money for individual investors like you and me. But if you believe the pundits and talking heads on TV, those days are long gone. Finito! Behind us forever…

We say nothing could be further from the truth. To earn the really massive returns, you’ve got to fish where others aren’t fishing—and the mining sector could be primed for a resurgence. That’s why top Motley Fool analysts just revealed their exciting new research on 5 ASX miners they believe could help you profit in 2019 and beyond…

Including:

The best way we see to play the global zinc shortage… Our #1 favourite large-cap miner (hint: it’s not BHP)… one early-stage gold miner we think could hit the motherlode… Plus two more surprising companies you probably haven’t heard of yet!

For free access to our brand-new research, simply click here or the link below. But be warned, this research is available free for a limited time only, and we reserve the right to withdraw it at any time.

Click here for your FREE report!