Key points
- Westpac shares are down more than 4% since January 1
- JP Morgan isn't so rosy on the outlook for Westpac in 2022
- According to the broker, Westpac's outlook is "highly uncertain"
- Westpac shares tanked almost 4% in the last 12 months
Westpac Banking Corporation (ASX: WBC) shares have started the year poorly and are now down more than 4% since January 1.
At the time of writing, the Westpac share price is rangebound today, currently trading at $20.34 cents apiece, up 0.2%.
The graph below charts Westpac's performance relative to the other banking majors and the S&P/ASX 200 Financials index (XFJ) over the last 12 months.
The whole group is down so far in 2022. But Westpac is now substantially trailing its peers on the bottom of the group's performance band.
With that in mind, let's hear what the team at JP Morgan had to say about Westpac in a note to clients from last week.
Westpac's outlook is 'highly uncertain': JP Morgan
The team at investment bank JP Morgan isn't so rosy on the outlook for Westpac in 2022. It assigns a neutral rating on the stock and values the company at $23.30 per share, implying around $3 of upside protection.
According to the broker, Westpac's outlook is "highly uncertain, with weak customer franchise metrics and revenue under pressure driven by compression on mortgage margins".
"Westpac's FY24 cost plan ($8bn target ex Specialist) is highly ambitious given it requires an approximate 20% reduction from the FY21 cost base, but we expect the market to remain sceptical on achieving this," the broker says.
Even though the bank has a robust capital surplus, this doesn't distinguish Westpac from its peers – as they too are well-capitalised – plus provision coverage now rests at the bottom end of the peer group.
The broker estimates Westpac's net interest income to decrease by around 4% in FY22 to $16.1 billion. It expects the bank won't make a recovery to FY21 levels until 2024.
As such, the broker also bakes in a 16 basis point decline in Westpac's net interest margin (NIM) for FY22 and a subsequent 6 basis point decrease in FY23.
Curiously, JP Morgan estimates that Westpac should deliver the strongest pre-provision profit growth in FY23/24, "largely on lower costs".
However, in the same breath, it estimates the bank's solid pre-provision profit growth will be dampened by higher impairment charges in FY22.
"Given our long-term concerns about the sustainability of mortgage margins across the industry (where WBC has a heavy exposure), we see the risk/reward as unattractive," the broker concluded.
A bit more on Westpac shares
Westpac shares are substantially underperforming their peers and have tanked almost 4% in the last 12 months.
This year to date, things aren't any better, with Westpac shares down 4.19%, well behind the benchmark indices.
At the time of writing, Westpac has a market capitalisation of $75 billion and trades on a price to earnings ratio (P/E) of around 15x.
