The Westpac Banking Corp (ASX: WBC) share price could be close to being fully valued.
That's the view of the team at Bell Potter, based on a note released this morning.
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What did the broker say about the Westpac share price?
According to the note, the broker has retained its hold rating and $24.00 price target on the bank's shares.
Based on the current Westpac share price of $22.65, this implies modest potential upside of 5.9% for investors over the next 12 months.
This isn't deemed enough of a potential return to warrant a rating any better than a hold.
Why isn't Bell Potter more positive?
The note reveals that Bell Potter has been looking over Westpac's bold cost cutting plans and has doubts that it will achieve its targets.
In case you're not familiar with the bank's plans, Westpac is aiming to reduce its cost base down to $8 billion by 2024. If it achieves this, it will be a big boost to its earnings growth in the coming years. However, Bell Potter has been crunching the numbers and doesn't think this target is achievable. It explained:
"Back in FY21, total costs were $5.24bn in the first half and $5.70bn in the second half. The cost increase in the second half is 9%, made up as follows: 1) +$138m BAU including lower leave utilisation from COVID-19 restrictions; 2) +$131m investment; 3) +$140m investment mainly in financial crime capabilities and systems, product governance, data and regulatory capital charges; and 4) +$55m mortgage related volumes and COVID-19 support."
"BAU is business as usual, so there is no need to factor this one out. The same can be said for structural productivity (i.e. efficiencies, thus the negative numbers), investment (we take this to mean activity to overcome erosion or similar in premises and equipment) and the usual risk and compliance. We have however excluded COVID-19 and similar items, being one-offs in a way. While the main increase is only -$10m in 1H20/2H20, it now jumps to +$409m in the next year."
"In summary, this amounts to roughly $4.99bn on average (with a low of $4.60bn and a high of $5.65bn) or $9.98bn for the full year and compares with the $8.00bn cost expectation in FY24e. Even with a $4.50bn low or $9.00bn for the full year, there is still a sizeable gap of $1.00bn. In terms of costs as a % of average assets, we will assume a low of say 0.50% even with a denominator of $900bn. This works out to be $4.50bn again for the costs or $9.00bn for the full year, thus a gap of $1.00bn as well."
All in all, it appears to feel that investors that believe the Westpac share price is dirt cheap right now because of its cost reduction plans, may want to think again.
