The Westpac Banking Corp (ASX: WBC) share price continued its positive run in February.
The banking giant's shares rose an impressive 13% during the month. This compares favourably to a 1% gain by the S&P/ASX 200 Index (ASX: XJO).
This latest gain means the Westpac share price is now up a sizeable 40% over the last six months.
Why did the Westpac share price outperform in February?
Investors were buying Westpac shares last month following the release of its first quarter update.
For the three months ended 31 December, the bank posted a $1.97 billion first quarter cash profit. This was up an enormous 144% over the quarterly average cash earnings of $808 million it achieved in the second half of FY 2020.
And excluding notable items, Westpac's cash earnings were up 54% over the second half average.
Speaking of which, it was these notable items that got investors particularly excited and helped drive the Westpac share price higher.
What were the notable items?
Boosting the bank's profit result was an impairment benefit of $501 million from improved credit quality, stronger economic outcomes, and a better economic outlook.
Management explained the reason for the impairment reversal. It said:
"While uncertainty remains around the impact of local COVID outbreaks, there is cause for optimism. The economy is recovering, consumer and business confidence is strong, and the labour market has been much more resilient than expected. At the end of December there were 12.9 million employed Australians compared to 13 million in March 2020.
We are also beginning to improve momentum in mortgages and while the book was little changed over the half, we have processed a significant increase in applications. Low interest rates, rising house prices, new construction, and high consumer confidence all point to continued recovery in home lending activity in 2021."
What else is supporting the Westpac share price?
Also giving the Westpac share price a lift in February was a broker note out of Goldman Sachs.
In response to the bank's first quarter update, Goldman retained its buy rating and lifted its price target by 20% to $25.76.
Even after February's strong gain, this price target implies potential upside of 6.5% over the next 12 months excluding dividends. And including the $1.10 per share fully franked dividend that the broker expects Westpac to pay in FY 2021, this potential return stretches to 11%.
Why is Goldman positive on Westpac?
Goldman explained why it thinks the Westpac share price is in the buy zone. It said:
"We reiterate our Buy on WBC given: i) as evidenced by today's update, we think WBC's business mix is best placed to benefit from the current NIM environment, ii) momentum appears to be picking up in the business, which should support volumes, iii) details of the three-year cost plan, due to be announced at the time of the 1H21 results, could be a potential catalyst to further support the re-rating, and iv) we also note that on our forecasts, WBC's surplus capital will stand at c. A$6 bn by 31-Mar-21 (on a pro-forma basis, against a 10.9% CET1 ratio), and with surplus franking credits also on hand, we think that once the market gets more comfort around the recovery in the economy, it will start to focus on WBC's capital management opportunities."
