2 reasons why the Westpac share price is cheap

This ASX bank share could be great value to look at.

| More on:
ASX bank shares buy A young boy in a business suit giving thumbs up with piggy banks and coin piles

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Key points

  • Westpac is expecting to report a jump in profit, yet its share price is down over the last year
  • Its estimated price/earnings (p/e) ratio for FY23 is only 11x
  • The grossed-up dividend yield for FY23 is 8.6%

The Westpac Banking Corp (ASX: WBC) share price has seen plenty of volatility since the start of the COVID-19 pandemic. But, at the current valuation, the ASX bank share looks like a leading contender.

There is a lot of competition in the banking space, including Commonwealth Bank of Australia (ASX: CBA), ANZ Group Holdings Ltd (ASX: ANZ), National Australia Bank Ltd (ASX: NAB), Bank of Queensland Limited (ASX: BOQ) and Bendigo and Adelaide Bank Ltd (ASX: BEN).

The last 12 months have been an interesting time for the banking sector with how interest rates have rapidly shot higher.

ASX bank shares like Westpac have come under pressure for passing on interest rate hikes quickly to borrowers, but not being as generous to savers.

In the current environment, I think there are a couple of key reasons why the Westpac share price looks cheap:

Low price/earnings ratio

The bank has a very low price/earnings (P/E) ratio. What that means is that it's trading at a low multiple of its earnings.

While an extremely low P/E ratio isn't necessarily what investors need to find, it can be helpful to find ones that are at good value, and hopefully buying a lower P/E ratio for that same business is usually helpful.

According to Commsec, Westpac could generate $2.04 of earnings per share (EPS). At the current Westpac share price, that puts the forward P/E ratio at 11 times FY23's estimated earnings.

That seems relatively cheap, particularly when compared to a peer like CBA which is currently trading at 17 times FY23's estimated earnings, a significantly more expensive valuation.

The lower P/E ratio also has a pleasing bonus – the dividend yield is particularly high. Commsec numbers suggest that the Westpac dividend per share could be $1.38, with a grossed-up dividend yield of 8.6%.

Rapidly increasing return on equity (ROE)

One of the biggest bits of help for Westpac could be the improvement in profitability thanks to the higher lending profits. This can help the Westpac share price as well.

An increasing return on equity (ROE) can make the business a lot cheaper.

My colleague James Mickleboro recently reported on comments from Morgans about the compelling situation for Westpac:

We view WBC as having the greatest potential for return on equity improvement amongst the major banks if its business transformation initiatives prove successful. The sources of this improvement include improved loan origination and processing capability, cost reductions (including from divestments and cost-out), rapid leverage to higher rates environment, and reduced regulatory credit risk intensity of non-home loan book. Yield including franking is attractive for income-oriented investors, while the ROE improvement should deliver share price growth.

Westpac share price snapshot

Despite the interest rate environment looking more favourable for bank profitability, the Westpac share price is down 3% over the past year.

Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has positions in and has recommended Bendigo And Adelaide Bank. The Motley Fool Australia has recommended Westpac Banking. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

More on Bank Shares

A corporate female wearing glasses looks intently at a virtual reality screen with shapes and lights representing Block shares going up today
Bank Shares

Are Westpac shares a buy following the bank's big tech update?

Is now a good time to buy the banking giant's shares? Let's find out.

Read more »

Different Australian dollar notes in the palm of two hands, symbolising dividends.
Bank Shares

Own CBA shares? It's payday for you!

A dividend is heading to CBA shareholders’ bank accounts.

Read more »

A man holds his hand under his chin as he concentrates on his laptop screen and reads about the ANZ share price
Bank Shares

Are CBA shares really worth $120?

It has been a good year for ASX bank shareholders.

Read more »

a group of people sit around a computer in an office environment.
Bank Shares

Westpac shares push higher on $9.8b technology simplification plan

Westpac plans to spend big on technology to close the gap on its rivals.

Read more »

A worried woman looks at her phone and laptop, seeking ways to tighten her belt against inflation.
Economy

NAB boss issues dire prediction for Aussie economy

NAB’s CEO has issued a stark warning on the outlook for Australia’s economic growth.

Read more »

Contented looking man leans back in his chair at his desk and smiles.
Bank Shares

Own CBA shares? Here's the tech stock the banking giant just invested in

CBA has made an interesting investment. Here's what you need to know.

Read more »

A woman gives two fist pumps with a big smile as she learns of her windfall, sitting at her desk.
Bank Shares

ANZ shares charge higher on $57.5 million class action settlement news

ANZ shares have continued their positive run on Monday.

Read more »

Two people comparing and analysing material.
Bank Shares

Better buy: CBA or Westpac stock?

Which ASX bank share is a better buy?

Read more »