Broker says Westpac share price ‘offers the most upside of the banks’

Why now could be the time to buy Westpac’s shares…

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The Westpac Banking Corp (ASX: WBC) share price was out of form on Wednesday.

The banking giant’s shares ended the day over 1% lower at $21.75.

Where next for the Westpac share price?

The good news is that the team at Goldman Sachs believe the Westpac share price could be heading a lot higher from current levels.

According to a note from earlier this week, the broker has upgraded the bank’s shares to a conviction buy rating with a $26.12 price target.

Based on the current Westpac share price, this implies potential upside of 20% for investors over the next 12 months.

In addition, the broker is forecasting fully franked dividends per share of 123 cents in FY 2022 and 135 in FY 2023. This represents yields of 5.65% and 6.2% respectively, which brings the total potential 12-month return to over 25%.

What did the broker say?

Goldman’s bullish view on the Westpac share price is predicated on its belief that the bank is well-placed to benefit from rising rates. It explained:

WBC provides strong leverage to rising rates and will particularly benefit from the relative lack of domestic deposit repricing that we have seen to date post recent rates cash rate rises. Furthermore, its shorter-dated replicating portfolio (three-years for deposits versus five-years for peers), will also see the benefit of higher rates play through its NIM quicker than peers.

And while the broker isn’t convinced that Westpac can achieve its bold cost reduction targets, it still expects a decent reduction. It said:

While we now expect the inflationary environment will make WBC’s A$8 bn expense target by FY24E unachievable, our like-for-like FY24E expense forecast of c. A$8.9 bn still implies an 18% reduction in reported expenses versus 1H22A annualised, and a 7% reduction in expenses, excluding large/notable items and the impact of potential asset sales, with some ground already made since the strategy’s launch in May-21.

In light of the above, the broker believes “WBC now offers the most upside of the banks over the next 12 months.”

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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