Is the Westpac Banking Corp (ASX: WBC) share price a buy? Some brokers like Morgan Stanley and Credit Suisse have had their say.
A lot has happened to the Westpac share price over the last 12 months. During the COVID-19 crash to 23 March 2020 it fell by just over 45% to $14.10. Since then it has risen by over 50%.
FY20 result
The FY20 report was released in November 2020 and it showed a large profit decline partly because of the effects of COVID-19.
Westpac's cash earnings were down 62% to $2.61 billion and cash earnings per share (EPS) fell 63% to 72.5 cents. Statutory net profit fell by 66% to $2.29 billion.
Westpac attributed the large drop of profit to a number of one-off items including provisions and costs for the AUSTRAC proceedings ($1.3 billion), provisions for estimated refunds, payments, costs and litigation relating to the royal commission, write-downs relating to intangible items and asset sales and revaluations.
Excluding notable items, cash earnings still declined 34% because of the difficult operating conditions.
Westpac noted that more than two thirds of Westpac's home loan customers on deferral packages had started making repayments again. At the time of the report, $16.6 billion of Australian home loans were in deferral, down from $54.7 billion. There were also $1 billion of Australian small business loans, down from $10.1 billion.
The big bank said it had a CET1 capital ratio of 11.13% at the end of FY20.
The board decided to pay a final, fully franked dividend of 31 cents per share. The total dividend to be paid represented 49% of Westpac's statutory profit which was in line with the current APRA guidance.
Westpac's CEO, Peter King, said at the time that while Westpac expects the economy to grow in the rest of 2021 and 2022, unemployment would remain elevated for some time.
What's happening now?
The Australian Prudential Regulation Authority (APRA) has lifted the limit about how much of a dividend that banks could pay. Previously, banks had to hold onto half of their statutory earnings. However, APRA does still expect banks to take a prudent approach.
As broker Credit Suisse has pointed out, this could allow the major banks to feel more comfortable to pay higher dividends in FY21 and beyond.
Other brokers, like Morgan Stanley, think the economy is in a better position and this will benefit Westpac as it's leveraged to a recovery, the big bank also has a healthy balance sheet and there's an ongoing sector rotation. The broker thinks that Westpac will outperform the S&P/ASX 200 Index (ASX: XJO) in 2021.
Valuation estimates
According to Commsec, the Westpac share price is valued at 17x FY21's estimated earnings. After a projected recovery of earnings, Westpac shares are priced at 12x FY23's estimated earnings.
Westpac also has a projected grossed-up dividend yield of 5.7% for FY21.
The West[ac share price targets of Morgan Stanley and Credit Suisse (which means where they think the Westpac share price will be in 12 months) combines for an average of $23.55, which suggests a potential capital gain of approximately 10% over a year.
