Westpac Banking Corp (ASX: WBC) shares are expected to generate much more profit in the coming years.
The ASX bank share is benefiting from the rising interest rates. The Reserve Bank of Australia (RBA) has hiked the official interest rate by 300 basis points, or 3%, from 0.1% to 3.1% since May.
Banks, including Westpac, have passed on more hikes for loans than for savings accounts, boosting their net interest margins (NIMs). In other words, it's good news for banking profitability in FY23.
This could be why the Westpac share price has done well over the past year.
The question is, how much of an impact will this have on Westpac's profit?
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Profit projections
I think that earnings per share (EPS) is a very important profit measure. It shows how well things are going for each shareholder and each share, not just the overall number. I don't think there's much point in growing total profit if it involves issuing a growing number of shares, which reduces the EPS.
EPS gives context to the share price and can help us work out the price/earnings (P/E) ratio.
Using the estimates on Commsec, the ASX bank share could generate $2.09 of EPS in FY23. This puts the Westpac share price at less than 12 times FY23's estimated earnings.
Looking at the potential dividend payment for the 2023 financial year, the ASX bank share could pay an annual dividend per share of $1.38, which translates into a grossed-up dividend yield of around 8%.
Are Westpac shares worth buying?
I think the banking sector will get an earnings boost this year thanks to the higher interest rates.
Share prices often follow earnings. In other words, if the profit goes up then the shareholder returns are likely to be decent as well.
The dividend income alone could be a solid return for 2023.
Westpac is also aiming to cut hundreds of millions of dollars in costs, which could improve profitability further over the next couple of years.
Out of the big four banks, I think I prefer Westpac shares to Commonwealth Bank of Australia (ASX: CBA) because they seem better value. As well, I like Westpac over ANZ Group Holdings Ltd (ASX: ANZ) because it isn't going through a major takeover process.
The one thing I'm wary of, however, is that the higher interest rates could lead to bad debt pains in the future, but the low P/E ratio may already reflect that possibility.
