This expert says the Westpac (ASX:WBC) share price has 25% upside

Westpac shares may have 25% upside according to one expert.

| More on:
Bank building with word Bank on it.

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

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%.

Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has recommended Westpac Banking Corporation. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

More on Bank Shares

A woman in a bright yellow jumper looks happily at her yellow piggy bank representing bank dividends and in particular the CBA dividend
Bank Shares

If I invest $10,000 in CBA shares, how much passive income will I receive in 2024?

Is this banking option a good option for income investors?

Read more »

A man in a suit smiles at the yellow piggy bank he holds in his hand.
Bank Shares

What's the outlook for Westpac shares in 2024?

Will 2024 be a good year for shareholders of Australia's oldest bank?

Read more »

a woman sitting at a desk checks an old fashioned calendar resting against her wall as she sits with documents in front of her.
Bank Shares

Which dates could move the NAB share price in 2024?

Here are the important dates for NAB shares investors next year.

Read more »

Bank building with the word bank in gold.
Bank Shares

What is the outlook for ASX bank shares in 2024?

Can investors bank on a good year over the next 12 months?

Read more »

A male investor wearing a white shirt and blue suit jacket sits at his desk looking at his laptop with his hands to his chin, waiting in anticipation.
Bank Shares

'Lower returns likely in FY24': Bank of Queensland shares dip amid AGM first strike

CEO tells shareholders to expect lower returns next financial year.

Read more »

A man sits in contemplation on his sofa looking at his phone as though he has just heard some serious or interesting news.
Bank Shares

Westpac share price shrugs off online banking outage woes

Westpac reported its online and mobile banking disruptions have been resolved.

Read more »

A man sits thoughtfully on the couch with a laptop on his lap.
Bank Shares

Own Bank of Queensland shares? You just had a November to remember

Bank of Queensland delighted shareholders last month. What went down?

Read more »

Young boy in business suit punches the air as he finishes ahead of another boy in a box car race.
Bank Shares

Here's why the CBA share price raced ahead of rival ASX 200 bank stocks in November

CBA shareholders booked some outsized gains in November.

Read more »