Up 20% in 6 months, is the Westpac share price now fully valued?

A woman dressed in red and standing in front of a red background peers thoughtfully at a piggy bank in her hand.

A woman dressed in red and standing in front of a red background peers thoughtfully at a piggy bank in her hand.

It has been a fruitful time to own Westpac Banking Corp (ASX: WBC) shares over the last six months. The Westpac share price has lifted by around 20% in that period.

Other ASX 200 bank shares have also performed well, with the Commonwealth Bank of Australia (ASX: CBA) share price up 14%, the National Australia Bank Ltd (ASX: NAB) share price rising 9% and the ANZ Group Holdings Ltd (ASX: ANZ) share price 13% higher.

Westpac stands above the rest over the past six months. But can this continue?

What’s driving Westpac shares?

The ASX banks are all expected to see improving profitability thanks to the higher official central bank interest rate.

Banks like Westpac are able to quickly pass on the interest rate rises to borrowers but give savers less of an interest rate rise. According to various media reporting, Treasurer Jim Chalmers has asked the Australian Competition and Consumer Commission (ACCC) to look at the rates offered on deposit accounts.

Being able to make more profit from the same loan book is a good help for Westpac.

Another aspect is that the business is looking to significantly reduce its cost base. In FY21, it spent $10.1 billion on underlying expenses, which were reduced to $9.4 billion in FY22. The target is $8.6 billion by FY24, Lower costs can improve the bank’s net profit position.

Are Westpac shares worth buying?

The ASX bank share could still be called cheap based on the conventional measure of looking at its price/earnings (p/e) ratio.

According to Commsec, the business is valued at under 12x FY23’s estimated earnings. Due to its low valuation, it could also pay a large dividend yield.

Commsec estimates suggest it could pay an annual dividend per share of $1.38. If paid, this would equate to a grossed-up dividend yield of 8.2%.

So, investors can still gain Westpac shares for a relatively low earnings multiple and a good dividend yield.

Of the analysts that Commsec cover, nine of them rate it as a buy, while four consider it a hold and four rate it as a sell.

The investment bank Goldman Sachs is among the brokers that rate the ASX bank share as a buy, with a price target of $27.68, according to Commsec. That suggests it could rise another 15% over the next year.

Foolish takeaway

Share prices often follow earnings over time. In other words, if Westpac shares are able to generate more profit, then this could drive shareholder returns for investors.

However, on the horizon, there is a concern about how much the higher interest rates will lead to higher arrears. I’m inclined to think that bad debts are going to rise by the end of 2023.

The post Up 20% in 6 months, is the Westpac share price now fully valued? appeared first on The Motley Fool Australia.

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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 recommended Westpac Banking. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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