Westpac Banking Corp (ASX: WBC) shares are pushing higher on Monday.
In afternoon trade, the banking giant's shares are up 1% to $23.03.
Investors appear to have responded positively to Friday's first quarter update from Australia's oldest bank.
Should you buy Westpac shares following its update?
If you don't already have exposure to the banking sector, then Westpac shares could be worth considering according to analysts at Goldman Sachs.
A note out of the investment bank reveals that its analysts have responded to Westpac's update by reiterated their conviction buy rating with an improved price target of $27.74.
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 now expecting a $1.47 fully franked dividend in FY 2023. This represents a 6.4% dividend yield, which stretches the total potential return beyond 26%.
This is a potential return that it two and a half times greater than the market's historical annual return.
What did the broker say?
Goldman notes that Westpac's asset quality during the first quarter is run-rating ahead of its first half expectations. Offsetting this, though, the broker suspects that its earnings could be a touch softer than forecasts. It explained:
WBC has released its Dec-22 (1Q23) Pillar 3 update, which suggests WBC's asset quality was run-rating slightly better than what was implied by our prior 1H23E forecasts, while the CET1 ratio was broadly consistent. As we had expected, no earnings update was provided. However, the slightly lower than expected RWAs could imply that either i) earnings were slightly below, and/or ii) capital deductions were slightly higher than what was implied by our 1H23 forecasts.
And while this has led to Goldman reducing its earnings per share forecast by 0.3% in FY 2023, it remains positive. Particularly given its belief that Westpac's margins have not yet peaked like rival Commonwealth Bank of Australia (ASX: CBA).
All in all, the broker believes that this makes Westpac shares great value at current levels. It adds:
We reiterate our Buy (on CL) recommendation on WBC given: i) trends in today's update suggest NIM trends more consistent with what NAB reported, rather than CBA, which suggested NIMs have now peaked, ii) despite WBC recently revising its FY24E cost target to A$8.6 bn (from A$8.0 bn), the bank's performance on cost management remains strong in this inflationary environment with a 9% step down in underlying costs expected over the next two years, iii) the stock is trading at a 23% 12-month forward PER discount to peers (historically has traded at a 2% discount).
