UBS upgrades Westpac to 'buy'
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The news: UBS has upgraded its rating on Westpac to 'buy' on expectations that the banking group is likely to benefit from cost-cutting initiatives and has the lowest balance sheet leverage among the big four lenders.
The numbers: UBS analysts noted that Australian bank share prices have outperformed the ASX 200 by around 30% over the year to date, despite aggregate return on equity contracting by 79 basis points and FY24 lowering 5% year over year.
Westpac shares were down 0.06% by 11:22am AEDT but has surged 55.87% over the past 12 months.
The context: The analysts listed three factors that could drive the greatest dispersion in value creation among the banking majors in FY25, comprising higher-for-longer cash interest rates, cost headwinds from increased investments, and further capital return via buybacks and dividends.
They noted that Westpac is most likely to gain from cost-out plans, not currently captured by consensus estimates, and has the lowest balance sheet leverage among its competitors.
UBS said that despite inflated valuations, the reputation of Australian banks as predictable and stable remains.
Its preferred picks in the sector are Westpac, Judo Bank (buy), Macquarie Group (neutral) and ANZ (neutral), while it holds 'sell' ratings on National Australia Bank, Bank of Queensland, Bendigo and Adelaide Bank and Commonwealth Bank.
The source: UBS research
