Are you attempting to estimate the Westpac Banking Corp (ASX: WBC) stock price? In this short article we take a look at the company through the lens of a good analyst.

Westpac is the second largest “Big Four” bank and financial services company based in Sydney. In addition to CommBank, ANZ and NAB, Westpac finances homeowners, investors, individuals (via credit cards and personal loans) and companies.

For long-term investors who want to invest in great companies and keep them for five, 10 or 20 years, we at Rask Rightly say that a good workplace and employee culture can lead to better retention of highly qualified personnel and in turn the long-term financial success of a company.

One way Australian investors can get a peek inside a company like Westpac Banking Corp or Bank of Queensland Limited is to use an HR / job website like Seek. Seek’s website contains data about a company’s human resources department, including things like employee reviews. For example, according to the latest data we pulled on WBC, the company’s overall workplace culture rating of 3.4 / 5 was better than the ASX banking sector’s average rating of 3.23.

ASX banking stocks like WBC need Debt and good profit margins to make your business profitable. That is, a bank receives money from time deposit holders and large investors and lends that money to homeowners, businesses and investors. The difference between what a bank pays to savers and what it receives (for example) from mortgage holders is the net interest margin, or NIM. Remember, with NIMs, the bigger the margin, the better.

If you are planning to estimate the profits of a bank such as WBC or National Australia Bank Ltd (ASX: NAB), it is important to know how much money the bank lends and what it makes per dollar lent to borrowers. Because of this, the NIM is arguably the primary measure of WBC’s profitability. For the major banking stocks on the ASX, we calculated the average NIM at 1.92%, while Westpac Banking Corp Bank’s credit margin was 1.9%, highlighting that it had a below-average return on lending when compared to its peer group. This may have many reasons worth investigating.

The reason analysts are scrutinizing the NIM so closely is because Westpac Banking Corp had 83% of its total revenue (similar to revenue) over the past year. Earned from lending alone.

Return on Equity, or simply ROE, helps you compare a bank’s profit to its total equity as shown on its balance sheet. The higher the ROE, the better. Westpac Banking Corp’s ROE for the last full year was 7.3%, meaning that for every $ 100 of equity in the bank, it made $ 7.30 in annual profit. This was below the industry average of 7.46%.

For Australian banks, the CET1 ratio (also known as “Common Equity Tier One”) is of the utmost importance. CET1 represents the bank’s capital buffer that can protect it from financial collapse. According to our numbers, Westpac Banking Corp had a hard core capital ratio of 11.1%. This was below the industry average.

A dividend discounting model, or DDM, is one of the most efficient ways to forecast ASX bank stocks. To do a DDM, we need to make an estimate of the bank’s future dividends (i.e. the next dividend for the whole year) and then apply a risk assessment. Let’s say the WBC’s dividend payment increases at a constant rate between 2% and 3% each year in the future. We use multiple rates of risk (between 6% and 11%) and then average the ratings.

According to this quick and easy DDM model, the WBC stock is valued at $ 5.27. However, given an “adjusted” or expected dividend payment of $ 1.07 per share, which is the preferred metric because it uses forecast dividends, the valuation is $ 18.18. The valuation compares to WBC’s current share price of $ 26.02. Since the company’s dividends are fully franked, we can make a further adjustment and make a valuation based on a “gross” dividend payment. Using gross dividend payments that factor in postage credits, the valuation is estimated at $ 25.98.

This means that while WBC stock price may seem expensive with our simple DDM model, it won’t make a decision based on this article . Please get away now and consider all of the risks and ideas we’ve presented here, including the benefit of dividend improvement and the positive effects of franking credits. Consider receiving our free investment report by email (read on).

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Are you wondering where to invest right now? Do you have cash that is “on the sidelines”? Are you looking for dividend income AND growth but not sure where to start? Rask’s seasoned ASX analyst team just released a full report detailing where we would be investing $ 10,000 right now. Not only are we offering these 11 investment ideas completely FREE, but we have also published a detailed podcast on the report!
Whether you have $ 2,000 or $ 50,000, our brand new analyst report could help transform your watchlist. Now you can have the full analyst report emailed to you for FREE by CLICKING HERE NOW.

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The information on this website is for general financial advice only. This means that the advice does not take into account your goals, your financial situation or your needs. For this reason, you should check that the advice is suitable for you and your needs before reacting to the information. In addition, you should obtain and read the Product Disclosure Statement (PDS) before deciding to purchase a financial product. If you do not know your needs, you should turn to a trusted and licensed financial advisor who can advise you personally on financial products. Please read our & Terms and Conditions and Financial Services Guide before using this website.

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