Is it time for investors to jump onto the Westpac Banking Corp (ASX: WBC) share price?
Westpac shares just keep going higher and higher. Over just the last two months it has risen by 13.3%.
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What's driving the Westpac share price higher?
Westpac saw most of its recent gain occur after releasing its FY21 first quarter update during reporting season.
The major ASX bank reported a quarterly statutory net profit of $1.7 billion, which was up significantly from the FY20 second half quarterly average of $550 million.
Its cash earnings came in at $1.97 billion, which was much stronger than the second half of FY20's quarterly average of $808 million (up 54% excluding notable items).
Westpac reported an impairment benefit of $501 million from improved credit quality, better economic outcomes and a better economic outlook.
Despite the low rate interest environment and all of the difficulties that Westpac is facing, it managed to increase its net interest margin (NIM) by 3 basis points, compared to the second half of FY20, up to 2.06%. The increase was 2 basis points excluding notable items.
However, Westpac did provide detail about the underlying numbers – core earnings were up 28%, or just 3% excluding notable items.
Westpac's balance sheet has been improving, just like the other big banks of Commowealth Bank of Australia (ASX: CBA), National Australia Bank Ltd (ASX: NAB) and Australia and New Zealand Banking Group Ltd (ASX: ANZ).
The Westpac common equity tier 1 (CET1) capital ratio improved by 74 basis points to 11.9% compared to 30 September 2020.
One thing that investors may want to note is that Westpac is now looking at its New Zealand business. Westpac said that given the changing capital requirements in New Zealand and the Reserve Bank of New Zealand requirement to structurally separate Westpac's New Zealand business operations from its operations in Australia, it's assessing the best structure for these businesses going forward.
Management thoughts
Westpac CEO Peter King said:
While uncertainty remains around the impact of local COVID outbreaks, there is cause of optimism. The economy is recovering, consumer and business confidence is strong, and the labour market has been much more resilient than expected. At the end of December there were 12.9 million employed Australians compared to 13 million in March 2020.
We are also beginning to improve momentum in mortgages and while the book was little changed over the half, we have processed a significant increase in applications. Low interest rates, rising house prices, new construction, and high consumer confidence all point to continued recovery in home lending activity in 2021.
Is the Westpac share price a buy?
The broker Morgan Stanley rates Westpac shares as a buy because of how exposed it is to the home loan market. Loan growth is increasing and the improvement in credit demand is likely to mean that the Westpac share price can keep rising.
On Morgan Stanley's numbers, Westpac is valued at 16x FY21's estimated earnings with a grossed-up dividend yield of 6.2%.
