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Why this leading broker has upgraded Westpac shares to “buy”

The Westpac Banking Corp (ASX: WBC) share price has started financial year 2021 on a positive note and is pushing higher on Wednesday.

At the time of writing the banking giant’s shares are up 1% to $18.11.

Why is the Westpac share price pushing higher?

Investors have been buying Westpac’s shares after it was the subject of a positive broker note out of Goldman Sachs.

According to the note, the broker has upgraded the bank’s shares to a buy rating with a $20.13 price target.

This price target implies potential upside of 11.5% for its shares over next 12 months excluding dividends. This increases to almost 18% if you include the $1.12 per share fully franked dividend that Goldman Sachs expects the bank to pay in FY 2021.

Why did Goldman Sachs upgrade Westpac’s shares?

Goldman has been looking at the loan deferrals which were introduced by the banks at the height of the pandemic. They were put in place to support homeowners and businesses during the crisis.

The majority of these deferrals were made for three months, with an option to extend them for a further three months.

Given how there are $236 billion of loans on repayment deferrals (8% of total credit), the performance of these loans will have a big say on sector earnings, capital requirements, and ultimately the share prices of the big four banks over the next 12 months.

The good news is that Goldman Sachs has been doing some bottom up analysis and believes the provisioning done by the banks could be adequate. This is particularly the case with Westpac, which it feels is best placed to deal with the end of the deferral period.

Goldman explained: “While the nature of the analysis, particularly in relation to SME deferrals, makes stock-based conclusions difficult to reach, with a relatively conservative mortgage LVR profile, and lower estimated number of SME loans on deferral (c.17% of total major bank SME deferrals), we think WBC looks relatively well-placed to deal with the end of the deferral period.”

“Coupled with the fact that: i) it should be exposed to improving industry NIM trends, and ii) it is trading ~2/3 standard deviations cheap vs. peers on EPS/PPOP multiples respectively, we upgrade it to Buy,” the broker added.

Should you invest?

I agree with Goldman Sachs and would be a buyer of Westpac’s shares at the current level. Especially if I were an income investor. The broker’s forecast $1.12 per share FY 2021 dividend represents a very attractive fully franked 6.2% yield.

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Motley Fool contributor James Mickleboro owns shares of Westpac Banking. The Motley Fool Australia has no position in any of the stocks mentioned. 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.

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