The Westpac Banking Corp (ASX: WBC) share price has been drifting lower in recent times – can things turn around for the ASX bank share?
It's down close to 10% since mid-August and down 14% since early June.
But, that could seem strange considering the Reserve Bank of Australia (RBA) interest rate is going up. There has long been a thought that higher interest rates would lead to higher profitability for banks by boosting the net interest margin (NIM).
The NIM measures how much profit banks are making on their lending, by looking at the overall lending rate and the cost of funding its loans (from places like savings accounts).
However, bank investors don't seem excited by the quickly-rising interest rate from the RBA. Australia's central bank has been increasing the interest rate by 50 basis points per month over the last few months.
Why has the Westpac share price been going backwards?
The reason for the decline, aside from the general market declines, could be that the pace of interest increases surprised investors. Small increases would probably have been useful for the banks. But, these quicker increases could cause issues for the loan book because borrowers may run into financial issues if they can't afford their much-higher repayments.
The FY22 half-year result was also mixed. Year over year, revenue was down 8% and cash earnings declined by 12%. It reported a return on equity (ROE) of 8.7%, down from 10.75% in FY19.
Westpac told investors that its net interest margin (NIM) was down as competition for lending and low interest rates impacted margins.
What could October bring?
I think Westpac's share price will likely be influenced by the ongoing volatility of the market. The Friday trading of the US share market saw another sell-off. For example, the S&P 500 Index (SP: .INX) fell 1.5% on Friday.
This week, the RBA is expected to increase the interest rate again in October.
As reported by Finder, its RBA cash rate survey of 39 experts and economists pointed almost unanimously to another basis point increase, meaning that the cash rate will rise to 2.85% in October.
While the business doesn't report its FY22 result this month, investors may be thinking about what it might say when it reports on 7 November 2022.
There could also be plenty more volatility in relation to energy markets, the Russian invasion of Ukraine and so on.
Will the Westpac share price rise from here?
Without a crystal ball, it's hard to say.
However, the broker Citi seems very bullish on Westpac, with a price target of $30. That implies a possible rise of over 40% over the next 12 months. It's expecting Westpac to earn much more profit in FY23, with a rise in the NIM.
If Westpac meets Citi's projections, the Westpac share price is valued at under 9 times FY23's estimated earnings with a possible grossed-up dividend yield of 11%.
Macquarie thinks banks will benefit from higher NIMs, but there could be trouble down the track with loan quality. It has a price target of just $22.25 on Westpac, putting the bank at under 12 times FY23's estimated earnings.
