The Westpac Banking Corp (ASX: WBC) share price has had a tough 12 months.
Since this time last year, the banking giant's shares have lost 18% of their value.
This leaves the Westpac share price trading at $21.38, which is well short of its 52-week high of $26.44.
Will the Westpac share price recover?
While the Westpac share price performance has been disappointing, one leading broker continues to believe that it can recover.
In fact, the team at Goldman Sachs believe the bank's shares can reach a new 52-week high over the next 12 months.
According to a recent note, the broker has a conviction buy rating and $26.55 price target on Australia's oldest bank's shares. This implies potential upside of 24% for investors over the next 12 months.
Why is Goldman so bullish?
Goldman named four key reasons why it thinks the Westpac share price is undervalued right now.
The first reason is the bank's strong leverage to rising rates. It expects rate hikes to boost Westpac's net interest margin quicker than peers. 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.
Another reason is its cost cutting plans. Although the broker feels that management is aiming for the stars with its targets, it suspects it could still hit the moon and make a meaningful reduction. Goldman 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.
Goldman also sees positives in the bank's plans to offer rapid digital mortgage approvals. It said:
Importantly, WBC's 27-Jul-22 market update highlighted that despite its focus on expenses, the business is still investing in its franchise, with the imminent launch of its "10-minutes to unconditional approval" digital mortgage, which we think will ultimately be leveraged into its broader mortgage processing capability, which currently appears inferior to peers, particularly as it relates to brokers. Initiatives like WBC being the first Australian bank to offer a payments "terminal-like" solution on Android mobiles also supports this view.
Finally, the valuation of the Westpac share price is just too cheap to ignore for Goldman Sachs. Its analysts believe the bank's shares offer the most upside over the next 12 months. It concludes:
On our revised forecasts and target prices, WBC now offers the most upside of the banks over the next 12 months. Beyond this, we note the stock is trading at a 20% discount to peers, versus the historic average 2% discount.
