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Key points
- The Westpac share price is cheap according to one leading broker, implying there's 30% upside with the price target
- Westpac has been cutting costs, though its net interest margin is also under pressure
- Asset quality remain strong, though its quarterly result included an impairment charge of more than $100 million
The Westpac Banking Corp (ASX: WBC) share price is rising after the bank delivered its FY22 first quarter update.
After seeing that announcement and the numbers, some of the country's leading brokers now reckon that the big four ASX bank is worth buying.
Firstly, let's look at what Westpac actually said before getting to the ratings:
Westpac's FY22 first quarter performance
The big four bank reported that its statutory profit for the three months to December 2021 was $1.82 billion (up 80%) and cash earnings were up 74% to $1.58 billion. However, excluding notable items, cash earnings were only up 1%.
Westpac's lending increased $5 billion, or 0.7% over the quarter. Expenses were down 26% to $2.7 billion. Excluding notable items, expenses fell 7%.
The business also didn't get the benefit of the earnings of some of the businesses that it has sold off, like insurance.
However, the net interest margin (NIM) fell another 8 basis points to 1.91% because of competition and higher liquid assets. The NIM can be integral for profit changes, which then can have a flow on effect to the Westpac share price.
The bank took on an impairment charge of $118 million, mostly due to increased provision overlays, reflecting continuing COVID-19 related uncertainty.
However, asset quality metrics continue to improve and it finished the period with a common equity tier 1 (CET1) capital ratio of 12.2%.
Comments from management
The Westpac chief financial officer (CFO), Michael Rowland, said:
We have made a sound start to the year and we are seeing the cost benefits of our simplification programs. The environment however remains highly competitive and we continue to see pressure on margins.
Given this, we are bringing forward our simplification plans and changing our operating structure to improve efficiency and move more of our people closer to the customers they support.
Broker thoughts about the Westpac share price
Morgans is one of the most positive brokers on the big bank at the moment. It rates Westpac as a buy and the price rating is $29.50, that's more than 35% higher than where it is today. The broker thinks that the medium-term doesn't look too bad for the bank.
The broker notes that Westpac is working and delivering on cutting costs.
Based on Morgans' estimates, the Westpac share price is valued at 9x FY23's estimated earnings with a projected FY23 grossed-up dividend yield of 10.6%.
Morgan Stanley is less certain, with a hold/equal weight rating. The price target here is $22.20 – only slightly higher than today. This broker sees that costs are coming down, but it's not clear how revenue and profit margins are going to perform.
Morgan Stanley puts the Westpac share price at 13x FY23's estimated earnings.
