The Westpac Banking Corp (ASX: WBC) share price may be flying this month, but it could be heading even higher.
That's the view of analysts at Morgans, which have upgraded the banking giant's shares this week.
What is Morgans saying about the Westpac share price?
According to the note, the broker believes that Westpac could offer the greatest value on a medium term view.
As a result, the broker has upgraded the company's shares to an add rating with a $26.71 price target.
Based on the current Westpac share price of $23.92, this implies potential upside of almost 12% for investors over the next 12 months.
In addition, the broker is expecting a fully franked 7% dividend yield in FY 2023. If we add this into the equation, the total return stretches to approximately 19%.
Why did the broker upgrade its shares?
Morgans upgraded Westpac after revising its earnings estimates higher to reflect the positive impact of rising interest rates on its net interest margin (NIM).
The broker explained:
Compared to previous forecasts, we downgrade FY22F and upgrade FY23-24F cash EPS, as a result of assuming greater NIM expansion, higher costs, and greater ramp-up in expensing for expected credit losses, partly offset by higher shares on issue. Notable differences to consensus include higher NIM uplift and lower expected credit loss expensing, resulting in a higher dividend forecast.
Another reason to be positive is the potential for share buybacks in the future. While Morgans notes that it wouldn't be possible right now due to capital constraints, it suspects buybacks could commence from FY 2024.
Buybacks are constrained by APRA's CET1 capital adequacy requirements. We expect WBC to print a c.11.1% CET1 ratio at FYE-22 vs 10.75% at 3Q22. APRA's revised framework will apply from 1 January 2023, which includes decreased risk weights applied to loans but higher minimum (equity) capital ratios. Post-implementation, WBC has indicated it will target an operating range for the CET1 capital ratio of 11-11.5%. We assume WBC undertakes c.$5bn of buybacks across FY24-25F, based on surplus capital build.
All in all, the broker feels this makes the Westpac share price great value at the current level.
