Is the Westpac Banking Corp (ASX: WBC) share price a buy? One fund manager from Pengana Capital Group Ltd (ASX: PCG) thinks that it is.
What's Westpac?
Westpac is one of the biggest ASX banks. Indeed, it's one of the biggest companies in Australia.
Some readers may not know that Westpac operates several other retail brands including RAMS, Bank of St George and Bank of Melbourne.
What has happened recently with the bank?
The Westpac share price has gone up by almost 18% since 4 November 2020, with news of the high effective rate of the Moderna vaccine and the BioNTech-Pfizer vaccine coming during the last few weeks.
Whilst it's still down 21% from where it was on 21 February 2020, it has actually risen 45% since the COVID-19 crash bottom of 23 March 2020.
It was at the start of this month (November) that the company reported its FY20 result. That seems like a long time ago, it was just before the US election.
Westpac reported that its cash earnings fell by 62% to $2.61 billion and statutory net profit after tax (NPAT) dropped by 66% to $2.29 billion. Excluding notable items, cash earnings still fell by 34% to $5.23 billion.
The big four ASX bank said that its net interest margin (NIM), which measures how much profit a bank makes from its loans, fell by 4 basis points to 2.08%.
Its common equity tier 1 (CET1) capital ratio was 11.13%, which was above the Australian Prudential Regulation Authority (APRA) benchmark of 10.5% to be unquestionably strong.
The bank said at that 28 October 2020, $16.6 billion of Australian home loans were being deferred (which is represented by 41,000 mortgage accounts). This has reduced from $54.7 billion which was represented by 146,000 mortgage accounts.
It also had $1 billion in Australian small business loans in deferral (represented by 4,300 small business customers). This has reduced from $10.1 billion.
Westpac did pay a fully franked final dividend of 31 cents per share. At the current Westpac share price that equates to a grossed-up dividend yield of 2.2%.
Why does Pengana think the Westpac share price is a buy?
Pengana fund manager Rhett Kessler revealed that his fund was increasing its exposure to the banks.
He said there are a number of reasons to want to increase exposure to the banks.
He thinks the big banks, like Westpac, may benefit from a meaningful reduction of the loan deferrals. Banks can grow from accelerated loan growth supported by low interest rates and first homeowner support. Westpac and other banks could be beneficiaries from the supportive federal budget, improving housing finance approvals and house prices holding up better than expected. The final reason to like the banks is that they may have lower than anticipated loss provisioning.
Pengana continues to focus on companies that have resilient business models, robust balance sheets, competent management and are available at a reasonable price. It also focuses on owning businesses that have demonstrated a track record of "having the power" in their various stakeholder relationships.
According to earnings estimates on Commsec, the Westpac share price is valued at 12x FY23's estimated earnings. The Commsec estimate for Westpac's dividend in FY23 is $1.20 per share, which would equate to a grossed-up dividend yield of 8.4%.
