The Westpac Banking Corp (ASX: WBC) share price has had a volatile time in 2022, but could the S&P/ASX 200 Index (ASX: XJO) bank share be an opportunity for investors? Some experts certainly think so.
Westpac has gone through a lot over the last few years.
But, after a period of difficulty, the bank may be about to see some better times ahead.
Expert opinions on Westpac shares
On a recent episode of Livewire's 'buy hold sell', host Ally Selby was talking to Plato Investment Management's Dr Don Hamson and Wheelhouse Partners' Alastair MacLeod.
MacLeod pointed out that dividends in the resources sector are expected to be reduced, whereas ASX 200 bank shares are expected to increase their dividends. He said that the banking sector is "more favourable" from that perspective.
The expert noted that when looking at Westpac's cost-to-income ratio, it's "one of the least profitable banks" but it's targeting $8 billion in savings. While MacLeod doesn't think the bank will "quite get there", it will still lead to a sizeable improvement, leading to profit growth which will help both earnings per share (EPS) and dividend growth.
He suggested that it's a buy for the dividend growth potential.
The other expert, Hamson, also called Westpac shares a buy. He said that he is seeing the cycle changing for banks.
Hamson noted that the last decade has seen interest rates fall. He said that net interest margins (NIMs) generally decline when interest rates are falling.
What's a NIM? It tells investors how much profit, in percentage terms, a bank is making on its lending. The interest rate on a loan is only part of the equation. There's also a cost to funding the money that is lent out. Banks get funding from many different sources, but savings accounts are one of the main sources of that funding. For example, a savings account with $100,000 could pay/cost 2% and the loan rate on a $100,000 mortgage could be 4%, translating into a NIM of 2% for the bank.
What's the main benefit for Westpac shares?
Hamson said that when interest rates are rising, the NIM improves because "banks immediately put up mortgage rates, and they're slower to put up deposit rates, which is exactly what they're doing now".
He concluded:
So we like the banks in general, and for the same sort of reasons, there's cost-out potential there as well. And it had been depressed in terms of its share price, so we like it. It's a buy.
Foolish takeaway
The Westpac share price is up 16% this month, but its valuation and potential dividend may still attract investor attention.
According to CMC Markets, the Westpac share price is valued at 12 times FY23's estimated earnings with a projected FY23 grossed-up dividend yield of 8.3%.
