The Westpac Banking Corp (ASX: WBC) share price has been an excellent performer in 2024, rising by 23.61%, as shown on the chart below. Add in the dividend payment, and it has been a very fruitful year for the shareholders of the company.
However, it is certainly worth asking the questions of what the returns may be from here, if there is more to come, and whether it is a good time to consider selling.
The ASX bank share sector's performance has been a big reason for the S&P/ASX 200 Index (ASX: XJO) achieving a positive return in 2024 to date amid pain for iron ore miners. However, one leading broker is not certain the strong run will continue.
Mixed financial performance
In the FY24 first-half result, Westpac reported its net profit after tax (NPAT) was $3.34 billion, down 16% year over year. Excluding notable items, it made $3.51 billion in NPAT, down 8% year over year and down 1% compared to the second half of FY23. Profit is normally a key focus for investors looking at Westpac shares.
It also reported a net interest margin (NIM) of 1.89%, down 7% year over year and down 5% half over half.
While competition was still a factor during the period, Westpac pointed out the impact on margins "moderated". According to the broker UBS, the NIM was better than the market was expecting.
On top of that, impairment charges at the bank were better than analysts were expecting.
Lower returning mortgages
UBS notes the ASX bank share is working on reducing its cost base and returning capital to shareholders through a share buyback and special dividend, which the market liked.
However, Westpac's return on equity (ROE) is currently around 9.3%, even though the credit loss ratio is performing well. According to UBS, the bank's consumer division accounts for 46% of total allocated capital, but it's only making a 9% return on the average allocated capital – the lowest of the past three years.
UBS suggests the mortgage returns/retail profits face "structural headwinds", which could impede the bank's ability to improve its ROE.
Potential Westpac share price returns
UBS is cautious about the bank's valuation, with the company trading on a premium to its historic price-earnings (P/E) ratio of around 12 in the last decade.
A price target tells us where the broker thinks the Westpac share price will be in 12 months. UBS' price target is $24, implying that the bank stock could fall nearly 16% in the next year.
However, the broker is projecting a fully franked dividend yield of just over 5% from the bank in FY25. That improves the projected net return to approximately negative 10%.
This may not be the best time to buy Westpac shares, but it's pleasing to see that UBS is more optimistic on the bank's outlook than it was before the HY24 result.
