Westpac share price is a buy: Broker tips ‘strongest EPS growth in the sector’

Westpac shares could be in the buy zone following its half-year results…

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Man pointing an upward line on a bar graph symbolising a rising share price.

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Key points

  • Westpac could be the bank share to buy now according to one leading broker
  • Citi think Westpac could deliver the strongest earnings per share (EPS) growth in the sector
  • Its analysts see potential for a 22% total return for investors over the next 12 months

On Tuesday, the Westpac Banking Corp (ASX: WBC) share price was a relatively positive performer.

While the banking giant’s shares only edged a modest 0.2% higher to $24.65, this was notably better than a 1% decline by the ASX 200 index.

Why did the Westpac share price defy the market selloff?

Investors were bidding the Westpac share price higher today after a number of brokers responded positively to the bank’s half-year results.

In case you missed it, on Monday Westpac reported an 8% decline in revenue to $10,230 million, a 12% reduction in cash earnings to $3,095 million, and a 61 cents per share interim dividend.

This compares favourably to the Visible Alpha consensus estimate for first-half cash earnings of $2.8 billion and an interim dividend of 59 cents per share.

Are its shares good value?

One leading broker that sees plenty of value in the Westpac share price is Citi.

In response to the bank’s half-year result, its analysts retained their buy rating and $29.00 price target.

Based on the current Westpac share price, this implies potential upside of 17.5% for investors. And if you throw in the 5% dividend yield the broker is forecasting in FY 2022 (rising to 6.3% in FY 2023), the total potential return stretches beyond 22%.

While Citi was pleased with the result, its main reason to celebrate was management’s decision to stick with its bold cost cutting target. Particularly at a time when its peers are abandoning their own.

Citi commented:

WBC surprised the Market by delivering 1H22 cash earnings of $3,095, representing a ~5% pre-provision profit beat. The feature of this result was the solid cost print driven by a ~2,500 reduction in permanent FTEs.

Unlike peers, management haven’t walked away from its FY24 cost base target of $8bn, as they had already incorporated 2.5% inflation. WBC’s revenue challenges also appear to moderating as the 2Q22 NIM (ex. Markets & Treasury) stabilised at 1.69%. A sharply higher 3 year swap rate will start to become a strong NIM tailwind from 2H22.

We have moved our FY22/23 EPS estimates up ~2-4% on this higher swap cost, but we have reduced our FY24 EPS by ~4% due to higher BDDs. We see the combination of higher revenue growth, as the cash rate rises, combined with a reducing absolute cost base, as delivering the strongest EPS growth in the sector. Maintain Buy.

Citigroup is an advertising partner of The Ascent, a Motley Fool company. Motley Fool contributor James Mickleboro has positions in Westpac Banking Corporation. 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 Scott Phillips.

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