Westpac (ASX:WBC) share price to close gap with CBA (ASX:CBA) says Morgans

Anticipation is building in the banking sector as the reporting season kicks off and the Westpac Banking Corp (ASX: WBC) share price is tipped to be the biggest winner.

a woman

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Anticipation is building in the banking sector as the reporting season kicks off and the Westpac Banking Corp (ASX: WBC) share price is tipped to be the biggest winner.

That's the view from Morgans as the broker believes the Westpac share price will close the gap with the outperforming Commonwealth Bank of Australia (ASX: CBA) share price.

This isn't to say that the broker has dour expectations for CBA. In fact, it's feeling bullish for the entire ASX banking sector during this reporting season.

CBA to set the mood for ASX banking sector

But it's the Commonwealth Bank of Australia (ASX: CBA) share price that's stealing the spotlight as it's the only one of the big four that will hand in its half year report card.

As the financial year end for the WBC share price, Australia and New Zealand Banking GrpLtd (ASX:ANZ) share price and National Australia Bank Ltd. (ASX: NAB) share price are in September, they will only issue trading updates.

What CBA reports will set the tone for the rest of the sector and Morgans sees upside risks to its earnings and dividend forecasts for the sector. This is despite being more bullish than consensus.

Multiple tailwinds

"While we continue to appear to have the lowest FY21 credit impairment charge forecast on the street for each major bank, we believe our forecasts are looking increasingly conservative," said Morgans.

"That is, we are seeing increasing upside risk to our earnings and dividend forecasts for FY21."

The big drop in the number of COVID-19 deferred loans, rising house prices and the bounce in economic activity are supporting the positive outlook for ASX banks.

Upside risks for ASX bank earnings and dividends

"We see potential for favourable revisions to macroeconomic assumptions and probability weights in the Dec-20 quarter," added Morgans.

"This is because the unemployment rate and house prices have fared better than assumed in the banks' base case scenarios for provisioning."

The large valuation gap between CBA and Westpac

But it's this optimism that will drive the outperformance of the Westpac share price at the expense of the CBA share price.

The Westpac share price has been lagging the pack, potentially due to concerns about the strength of its balance sheet as Westpac is the most likely to need to raise capital compared to the other three big banks.

On the other hand, the CBA share price fared the best as it holds the strongest balance sheet in the group.

Why the Westpac share price can outperform CBA

"However, as investor confidence in banks increases, we believe investors will place a more normal weighting on risk profiles and pay more attention to valuations," said Morgans.

"Consequently, we expect CBA's share price to underperform the other major banks and we expect WBC's share price to outperform the other major banks over the next 12 months."

Motley Fool contributor Brendon Lau owns shares of Australia & New Zealand Banking Group Limited, Commonwealth Bank of Australia, National Australia Bank Limited, and Westpac Banking. 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.

More on Bank Shares

A woman sits at her computer with her hand to her mouth and a contemplative smile on her face as she reads about the performance of Allkem shares on her computer
Bank Shares

Guess which big 4 bank preemptively cut interest rates ahead of the RBA's next decision?

This bank has pipped the RBA to the punch.

Read more »

A man closesly watch a clock, indicating a delay or timing issue on an ASX share price movement
Dividend Investing

Little time left to snap up the next dividend from ANZ shares

ANZ shares will pay an interim dividend of 83 cents per share on 1 July.

Read more »

a man holds his arms out and shrugs his shoulders as if indicating he doesn't know the answer to a question he's been asked.
Bank Shares

Why is the NAB share price tumbling today?

Let's find out why this banking giant's shares are falling today.

Read more »

A woman standing on the street looks through binoculars.
Bank Shares

Here's the latest earnings forecast out to 2029 for Westpac shares

How much could Westpac’s earnings grow in the coming years?

Read more »

Confident male executive dressed in a dark blue suit leans against a doorway with his arms crossed in the corporate office
Bank Shares

CBA is the last big 4 bank to report. What should investors expect based on the other banks?

What can investors expect with the CBA’s upcoming report?

Read more »

The sea's vastness is rivalled only by the refreshing feel of the drinks two friends share as they saunter along its edge, symbolising passive income.
Dividend Investing

Which ASX 200 bank stock pays the most passive income?

What’s the best ASX 200 bank to invest for passive income?

Read more »

Woman with a concerned look on her face holding a credit card and smartphone.
Bank Shares

What price target does Macquarie have on ANZ shares following its result?

Is the broker bullish or bearish on this banking giant? Let's find out.

Read more »

A businesswoman on the phone is shocked as she looks at her watch, she's running out of time.
Dividend Investing

Hoping to bank the next dividend from NAB shares? Better hurry…

NAB shares will pay an interim dividend of 85 cents per share next month.

Read more »