Can perennial ASX 200 banking bridesmaid Westpac finally find love?

Westpac could deliver, some believe.

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Key points

  • Westpac shares join the list of ASX 2o0 banks taking a hit this year
  • The share has failed to recover to its pre-pandemic highs
  • Westpac shares are down 17% in the past 12 months

Shares of ASX 200 banking giant Westpac Banking Corp (ASX: WBC) are rangebound today and currently trade less than 1% in the green at $21.60.

After an impressive start to the year in January, Westpac joined the list of Australian banking majors in a volatility-driven period that's extended to date.

In broad market moves, the S&P/ASX 200 Financials Index (ASX: XFJ) is also flat on the day and trades less than 1% in the red.

The Westpac share price return is plotted next to this index on the chart below for the past 12 months. Note the striking similarity in direction closeness of fit.

TradingView Chart

Can Westpac catch a bid?

It was a difficult period for Westpac shares throughout the pandemic. The banking giant has failed to claw back losses incurred as a result of the March 2020 sell-off, unlike several of its peers.

Although, a closer look at its numbers helps explain why this may be so.

Westpac delivered a return on equity (ROE) of 7.4% in its last filing and currently trades at a price-to-earnings ratio (P/E) of 15.75 times.

The share is also priced at a price-to-book ratio of 1.09 times, whereas it trades at approximately 17 times cash flow.

Compared to the GICS Financials Industry median, Westpac sits behind its peers on each of these metrics. A summary of its performance against major banking peers is observed below, taken/calculated from the financial statements of each name.

Company NameROE – %Operating Margin – %Net Margin – %P/E
Westpac Banking Corp (ASX: WBC) 7.4%46.4%26.1%15.75
Australia and New Zealand Banking Group Ltd (ASX: ANZ) 10.9%53.7%35.2%10.72
Commonwealth Bank of Australia (ASX: CBA) 12.8%57.1%41.5%17.54
National Australia Bank Ltd (ASX: NAB) 11.1%54.2%40.2%14.81
Bendigo and Adelaide Bank Ltd (ASX: BEN) 7.5%40.8%30.0%10.50
Bank of Queensland Limited (ASX: BOQ) 7.9%43.5%30.0%10.85
Macquarie Group Ltd (ASX: MQG) 18.0%26.7%35.9%12.96
Median 10.9%46.4%35.2%13.0
Average10.8%46.1%34.1%13.3

A cohort of brokers still believe Westpac has legs to run as well. For example, analysts at UBS led by John Storey recently upgraded Westpac shares to a buy and $27 price target in a recent note.

Storey said the broker is "positive on the net interest margin environment" in the wake of the series of interest rate hikes passed onto banking customers this year.

This is important, Storey says as a large chunk of Australian residential mortgages are set to mature in the next 2 years. Westpac is well positioned to capture this tailwind, he goes on to add.

Westpac's net interest margin was 2.06% in FY21, – ahead of the industry's 2% – and this will be a key number to watch in the bank's FY22 results in the first week of November.

Meanwhile, analysts are forecasting Westpac to deliver a 6.12% dividend yield over the next 12 months [at the current share price], according to Refinitiv Eikon data.

Furthermore, a total of 6 out of 14 brokers covering the company rate its shares a buy right now, per Refinitiv.

The consensus price target on this is $24.24, implying a 12% return potential should this number be correct.

Westpac shares are down 17% in the past 12 months.

Motley Fool contributor Zach Bristow 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 positions in and has recommended Bendigo and Adelaide Bank Limited. The Motley Fool Australia has recommended Macquarie Group Limited and Westpac Banking Corporation. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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