While the Westpac Banking Corp (ASX: WBC) share price has been performing better this month, it is still down materially from its highest levels.
This has been caused by concerns over margin pressures, its cost cutting plans, and ultimately fears that its shares could be a value trap.
A value trap is a share that is trading at such low levels that it appears to be dirt cheap when in fact it is being accurately priced by the market.
Is the Westpac share price a value trap?
According to the team at Morgans, its analysts believe the bank’s first quarter update demonstrates that the Westpac share price isn’t a value trap.
Morgans commented: “We believe the trading update supports the view that the challenges facing WBC are not unsurmountable and that the stock should not be priced like a value trap. We believe the update particularly serves to alleviate investor concerns around the cost outlook.”
According to the note, the broker has retained its add rating and $29.50 price target on the shares of Australia’s oldest bank. Based on the current Westpac share price, this implies potential upside of 37% over the next 12 months.
What did Morgans say?
Although Morgans acknowledges that Westpac’s net interest margin (NIM) is falling, its analysts aren’t overly concerned. Particularly given their belief that competition in home loans will ease as rates rise.
Its analysts explained: “With the RBA’s announcement that its bond purchase program will end on 10 February 2022 and with prospects of rising interest rates, we believe there are growing prospects of normalisation in basis risk which we generally expect to hit the NIMs of non-bank lenders harder than the NIMs of banks. We consequently see diminishing ability of the non-bank lenders to compete on price and we see potential for the prevailing fierce competition in the variable rate home loans space to abate.”
In addition, the broker remains confident that Westpac can achieve its target of an $8 billion cost base by FY 2024.
It commented: “WBC’s FY21 result led to increased investor scepticism about the outlook for operating expenses and the ability of WBC to achieve its $8bn cost target by FY24. We believe today’s trading update will serve to alleviate some of this scepticism. 1Q22 operating expenses (excluding notable items) are broadly in line with our expectation. Expenses reduced 7% from 2H21 to 1Q22 on a run-rate basis. Including notable items, operating expenses reduced 26% over this period.”
All in all, Morgans believes this makes the Westpac share price great value at the current level.
The post Here’s why the Westpac (ASX:WBC) share price isn’t a value trap appeared first on The Motley Fool Australia.
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Motley Fool contributor James Mickleboro owns Westpac Banking Corporation. 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 recommended Westpac Banking Corporation. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.
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