This expert says the Westpac (ASX:WBC) share price has 25% upside

The Westpac Banking Corp (ASX: WBC) share price could have a lot of upside according to one expert.

Westpac is one of the big four ASX banks. It’s now smaller than both Commonwealth Bank of Australia (ASX: CBA) and National Australia Bank Ltd (ASX: NAB). But Westpac remains a bit bigger than Australia and New Zealand Banking Group Ltd (ASX: ANZ).

It has been a tough ride for long-term Westpac shareholders. Over the past five years, Westpac shares have dropped 31%.

However, interestingly, the Westpac share price has jumped 14% since the release of its FY22 first quarter performance. So let’s take a look at some of the highlights of that. It was this update that the broker Morgans got a good look at Westpac.

FY22 first quarter

In early February, Westpac announced that for the three months to 31 December 2021, it generated $1.82 billion of statutory net profit after tax (NPAT). This was an 80% increase on the quarterly average from the second half of FY21.

The headline cash earnings were also up heavily over the quarter, up 74% to $1.58 billion. However, excluding notable items, cash earnings were only up 1%. Investors often like to look at the profit (and direction of profit) to decide what level to value the Westpac share price.

Westpac’s lending was up $5 billion, or 0.7%, in the first quarter. This was across institutional, mortgages and New Zealand.

The net interest margin (NIM) was 1.91%, down 8 basis points because of competition and higher liquid assets.

Westpac’s expenses came to $2.7 billion, which was down 26%. Excluding ‘notable items’, expenses were down 7%. It has reduced its headcount by more than 1,100. Costs are expected to be lower in FY22 and decline through the year, including from an organisational simplification. It’s committed to an $8 billion cost target by FY24.

The big four ASX bank recognised an impairment charge of $118 million, mostly from reflecting increased provision overlays due to continuing COVID-19 related uncertainty. However, Westpac said that asset quality metrics continue to improve.

Westpac also said that its balance sheet remains strong, with a common equity tier 1 (CET1) capital ratio of 12%, comfortably above APRA’s new benchmark of 10.25% for the major banks.

Westpac share price upside

The big four ASX bank is rated as a buy by the broker Morgans with a price target of $29.50. That’s a potential increase of around 25% over the next year. Morgans thinks Westpac shares shouldn’t be priced as cheaply as it is/was after successfully cutting (some) costs and a better outlook.

Based on the latest Westpac share price, Morgans values the bank at 10x FY23’s estimated earnings with a FY23 projected grossed-up dividend yield of 9.7%.

The post This expert says the Westpac (ASX:WBC) share price has 25% upside 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 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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