Anticipation is building in the banking sector as the reporting season kicks off and the Westpac Banking Corp (ASX: WBC) share price is tipped to be the biggest winner.
That’s the view from Morgans as the broker believes the Westpac share price will close the gap with the outperforming Commonwealth Bank of Australia (ASX: CBA) share price.
This isn’t to say that the broker has dour expectations for CBA. In fact, it’s feeling bullish for the entire ASX banking sector during this reporting season.
CBA to set the mood for ASX banking sector
But it’s the Commonwealth Bank of Australia (ASX: CBA) share price that’s stealing the spotlight as it’s the only one of the big four that will hand in its half year report card.
As the financial year end for the WBC share price, Australia and New Zealand Banking GrpLtd (ASX:ANZ) share price and National Australia Bank Ltd. (ASX: NAB) share price are in September, they will only issue trading updates.
What CBA reports will set the tone for the rest of the sector and Morgans sees upside risks to its earnings and dividend forecasts for the sector. This is despite being more bullish than consensus.
“While we continue to appear to have the lowest FY21 credit impairment charge forecast on the street for each major bank, we believe our forecasts are looking increasingly conservative,” said Morgans.
“That is, we are seeing increasing upside risk to our earnings and dividend forecasts for FY21.”
Upside risks for ASX bank earnings and dividends
“We see potential for favourable revisions to macroeconomic assumptions and probability weights in the Dec-20 quarter,” added Morgans.
“This is because the unemployment rate and house prices have fared better than assumed in the banks’ base case scenarios for provisioning.”
The large valuation gap between CBA and Westpac
But it’s this optimism that will drive the outperformance of the Westpac share price at the expense of the CBA share price.
The Westpac share price has been lagging the pack, potentially due to concerns about the strength of its balance sheet as Westpac is the most likely to need to raise capital compared to the other three big banks.
On the other hand, the CBA share price fared the best as it holds the strongest balance sheet in the group.
Why the Westpac share price can outperform CBA
“However, as investor confidence in banks increases, we believe investors will place a more normal weighting on risk profiles and pay more attention to valuations,” said Morgans.
“Consequently, we expect CBA’s share price to underperform the other major banks and we expect WBC’s share price to outperform the other major banks over the next 12 months.”
Where to invest $1,000 right now
When investing expert Scott Phillips has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for more than eight years has provided thousands of paying members with stock picks that have doubled, tripled or even more.*
Scott just revealed what he believes are the five best ASX stocks for investors to buy right now. These stocks are trading at dirt-cheap prices and Scott thinks they are great buys right now.
*Returns as of February 15th 2021
Motley Fool contributor Brendon Lau owns shares of Australia & New Zealand Banking Group Limited, Commonwealth Bank of Australia, National Australia Bank Limited, and Westpac Banking. 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 Bruce Jackson.
- This underperforming ASX large cap is sitting on a ~10% dividend yield – April 16, 2021 5:00pm
- The Monadelphous (ASX:MND) share price surges as Rio Tinto (ASX:RIO) overhang lifts – April 16, 2021 1:18pm
- Is the Afterpay (ASX:APT) share price set to surge later this month? – April 15, 2021 11:06am