3 reasons why the Westpac (ASX:WBC) share price could be a buy

There are a few different reasons why the Westpac Banking Corp (ASX: WBC) share price could be a buy right now.

That’s despite the Westpac share price rising by 44% over the last six months.

The big four ASX bank has risen a lot, but there are a few reasons why the broker Morgan Stanley thinks that Westpac could still be a compelling ASX share to own:

Share buyback

A year ago during the crash it might have been hard to believe that the big four banks of Westpac, Commonwealth Bank of Australia (ASX: CBA), National Australia Bank Ltd (ASX: NAB) and Australia and New Zealand Banking Group Ltd (ASX: ANZ) would end up with such high levels of capital. But here we are.

In the first quarter of FY21, Westpac reported that its common equity tier 1 (CET1) capital ratio had increased to 11.9% as at 31 December 2020 – that was up 74 basis points over the quarter and 111 basis points over the year. The strength of the bank balance sheets was materially better than what the broker was expecting.

Morgan Stanley thinks that Westpac will launch a share buyback. This is when a business buys back its own shares from shareholders. It can be a way to increase the ownership and per-share profit statistics for existing shareholders without the shareholder having to take any action.

A better dividend

Westpac shareholders suffered a huge dividend cut during 2020 because of the impacts of the COVID-19 pandemic on its profitability.

There was also the $1.3 billion civil penalty that Westpac had to pay in relation to the admitted contraventions of the Anti-Money Laundering and Counter Terrorism Financing Act.

But those issues are now fading into history. In the first quarter of FY21, Westpac reported cash earnings of $1.97 billion, which was more than double the FY20 second half quarterly average profit of $808 million – up 54% excluding notable items.

Morgan Stanley believes that a large dividend increase is coming for those suffering Westpac shareholders.

The broker thinks that Westpac could pay an annual FY21 dividend of $1.10 per share, which equates to a grossed-up dividend yield of 6.4% at the current Westpac share price.

Lower costs

It’s a difficult income environment for banks at the moment. With the official RBA interest rate at close to 0%, it makes it hard for banks to earn as high of a profit margin, or net interest margin (NIM), as they used to.

But banks can still take action on costs, which is what the broker Morgan Stanley is looking at Westpac to do.

The broker thinks that the big four ASX bank can cut its expenditure by approximately 10%, which would help deliver stronger profitability.

What’s the Westpac share price valuation?

According to the Morgan Stanley earnings estimate for FY21, the Westpac share price is valued at 16x FY21’s estimated earnings.

The broker rates Westpac as a buy, with a price target of $27.20.

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Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. 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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