Westpac Bank shares attractive in the wake of royal commission


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Key statistics: ASX: WBC

Closing share price 23.10.18: $26.580 52-week high: $33.650

52-week low: $25.910

westpac bank shares

Most recent dividend: 94c

Annual dividend yield: 7.14% Franking: 100%

Westpac Bank (WBC) is Australia's first company and bank, and also provides banking, wealth and insurance products in New Zealand and various Pacific island nations.

In the wake of the royal commission, Australia's major banks are under the pump.

Shocking treatment of customers and questions raised regarding lending standards are expected to cause banks to further tighten their lending standards which will most certainly further reduce lending growth. It may even turn negative.

The full effects are hard to predict but, with lower loan growth, higher funding costs, and a weak property market, the earnings outlook is the worst it's been in years.

The prospect for long-term investors, however, now look more favourable than they have for some time.

Westpac Bank, in particular, has seen its share price fall by around a third since peaking at $40 just over three years ago, taking it below our $27 buy price.

One approach to valuing a bank involves considering the valuation in terms of book value - the amount of equity reported on the balance sheet.

A business that can earn sustainable and good returns on its equity deserves a valuation above its book value, and that's the case with Westpac. We expect a return on equity of 10%-12%.

At the moment, the stock is trading at around 1.4 times its book value - an attractive multiple considering the quality of its franchise.

Due to the almost complete lack of growth, dividends will be the primary source of prospective returns.

Westpac is a well-capitalised, high-quality bank available at an attractive price.

Its retail banking franchise is not far behind that of Commonwealth Bank's, and with its more attractive valuation our preference is for Westpac.

Noting our recommended maximum portfolio weighting to the banking sector of 20%, we're upgrading to BUY.

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Rakesh Tummala is a senior analyst at Intelligent Investor (under AFSL 282288), owned by InvestSMART Group Limited. Rakesh started his career as junior analyst at Intelligent Investor. He since had roles as bank and insurance analyst, and rejoined the team in 2018. Rakesh covers financial services including banks and insurers. He has degrees in finance and economics from UNSW. To unlock Intelligent Investor stock research and buy recommendations, take out a 15-day free membership.

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