The Westpac Banking Corp (ASX: WBC) share price could have a lot of upside according to one expert.
Westpac is one of the big four ASX banks. It's now smaller than both Commonwealth Bank of Australia (ASX: CBA) and National Australia Bank Ltd (ASX: NAB). But Westpac remains a bit bigger than Australia and New Zealand Banking Group Ltd (ASX: ANZ).
It has been a tough ride for long-term Westpac shareholders. Over the past five years, Westpac shares have dropped 31%.
However, interestingly, the Westpac share price has jumped 14% since the release of its FY22 first quarter performance. So let's take a look at some of the highlights of that. It was this update that the broker Morgans got a good look at Westpac.
FY22 first quarter
In early February, Westpac announced that for the three months to 31 December 2021, it generated $1.82 billion of statutory net profit after tax (NPAT). This was an 80% increase on the quarterly average from the second half of FY21.
The headline cash earnings were also up heavily over the quarter, up 74% to $1.58 billion. However, excluding notable items, cash earnings were only up 1%. Investors often like to look at the profit (and direction of profit) to decide what level to value the Westpac share price.
Westpac's lending was up $5 billion, or 0.7%, in the first quarter. This was across institutional, mortgages and New Zealand.
The net interest margin (NIM) was 1.91%, down 8 basis points because of competition and higher liquid assets.
Westpac's expenses came to $2.7 billion, which was down 26%. Excluding 'notable items', expenses were down 7%. It has reduced its headcount by more than 1,100. Costs are expected to be lower in FY22 and decline through the year, including from an organisational simplification. It's committed to an $8 billion cost target by FY24.
The big four ASX bank recognised an impairment charge of $118 million, mostly from reflecting increased provision overlays due to continuing COVID-19 related uncertainty. However, Westpac said that asset quality metrics continue to improve.
Westpac also said that its balance sheet remains strong, with a common equity tier 1 (CET1) capital ratio of 12%, comfortably above APRA's new benchmark of 10.25% for the major banks.
Westpac share price upside
The big four ASX bank is rated as a buy by the broker Morgans with a price target of $29.50. That's a potential increase of around 25% over the next year. Morgans thinks Westpac shares shouldn't be priced as cheaply as it is/was after successfully cutting (some) costs and a better outlook.
Based on the latest Westpac share price, Morgans values the bank at 10x FY23's estimated earnings with a FY23 projected grossed-up dividend yield of 9.7%.