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WAFD Rides on Strategic Buyouts Amid Weak Asset Quality
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WaFd Inc. (WAFD - Free Report) remains well-positioned for growth on the back of high rates, decent loan demand, robust liquidity and strategic buyouts. However, rising costs and deteriorating asset quality are woes.
WaFd remains focused on its organic growth strategy, which is demonstrated through its revenue growth. The company’s revenues reflected a compound annual growth rate (CAGR) of 7.5% over the last five fiscal years (2018-2023). This uptrend was primarily driven by a rise in net loan balances, which witnessed an 8.8% CAGR over the same time frame. In the first half of fiscal 2024, revenues dipped on a year-over-year basis while the loan balance improved.
The company expanded into the lucrative California market in February by acquiring Luther Burbank Corporation (LBC). This deal is expected to be accretive to earnings by roughly 8% in fiscal 2025 and would lead to some cost reduction as well. The company’s top line is likely to get a boost on decent loan demand and expansionary initiatives. We project total revenues to fall 5.1% this year but increase 11.6% and 9.9% in fiscal 2025 and fiscal 2026, respectively. Further, we estimate net loan receivables to witness an 8.4% CAGR by fiscal 2026, majorly driven by the LBC deal.
WAFD’s net interest margin (NIM) is likely to expand, with the Federal Reserve expected to keep the interest rates high in the near term. However, the pace of expansion will be subdued due to rising funding costs. The company’s NIM witnessed an increase in fiscal 2022 to 3.16% and further expanded to 3.40% in fiscal 2023 attributed to higher interest rates. Though NIM declined in the first half of fiscal 2024 on a year-over-year basis, higher rates will likely aid the metric in the upcoming quarters. We estimate NIM to be 2.78% this year as higher deposit costs exert pressure on it.
As of Mar 31, 2024, WaFd’s total borrowings were $5.3 billion, up from $3.9 billion as of Sep 30, 2023, attributed to the LBC acquisition. Among the debt incurred from this acquisition, $94 million in senior unsecured term notes are set to mature on Sep 30, 2024. Moreover, at the end of the second fiscal quarter of 2024, the company’s cash and cash equivalents were $1.51 billion. The company’s decent earnings strength enables it to address its near-term debt obligations, even in the event of economic turmoil.
Nonetheless, WaFd has witnessed a persistent increase in operating expenses. The company’s expenses have witnessed a 7.3% CAGR, driven by higher compensation costs and technological investments. The uptrend continued during the first six months of fiscal 2024. Though the LBC acquisition is expected to drive cost reduction to some extent, overall non-interest expenses are likely to remain on the higher side, given the bank’s inorganic expansion strategy, ongoing technological upgrades and inflationary pressure. We estimate total non-interest expenses to record a CAGR of 6.7% over the next three fiscal years.
Additionally, WAFD’s asset quality has been worsening over the past few years. Provision for credit losses rose in fiscal 2021, 2022, and 2023 as the company continued to build reserves to tackle the deteriorating macroeconomic backdrop. Provisions increased further during the first half of fiscal 2024 due to the LBC acquisition. Provisions are likely to remain high going forward, given the expectations of an economic slowdown. We project provisions to be $19.1 million this year.
WAFD currently carries a Zacks Rank #3 (Hold). Over the past six months, shares of the company have lost 21.2% compared with the industry’s decline of 12.5%.
Image Source: Zacks Investment Research
Banking Stocks Worth Considering
Some better-ranked banking stocks worth a look are Northrim BanCorp, Inc. (NRIM - Free Report) and East West Bancorp, Inc. (EWBC - Free Report) .
The Zacks Consensus Estimate for NRIM’s current-year earnings has been revised 12.2% upward in the past 60 days. The company’s shares have lost 6.9% over the past six months. NRIM currently sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks Rank #1 stocks here.
The Zacks Consensus Estimate for EWBC’s current-year earnings has been revised marginally upward in the past two months. The company’s shares have lost 1.1% over the past six months. EWBC currently carries a Zacks Rank #2 (Buy).
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WAFD Rides on Strategic Buyouts Amid Weak Asset Quality
WaFd Inc. (WAFD - Free Report) remains well-positioned for growth on the back of high rates, decent loan demand, robust liquidity and strategic buyouts. However, rising costs and deteriorating asset quality are woes.
WaFd remains focused on its organic growth strategy, which is demonstrated through its revenue growth. The company’s revenues reflected a compound annual growth rate (CAGR) of 7.5% over the last five fiscal years (2018-2023). This uptrend was primarily driven by a rise in net loan balances, which witnessed an 8.8% CAGR over the same time frame. In the first half of fiscal 2024, revenues dipped on a year-over-year basis while the loan balance improved.
The company expanded into the lucrative California market in February by acquiring Luther Burbank Corporation (LBC). This deal is expected to be accretive to earnings by roughly 8% in fiscal 2025 and would lead to some cost reduction as well. The company’s top line is likely to get a boost on decent loan demand and expansionary initiatives. We project total revenues to fall 5.1% this year but increase 11.6% and 9.9% in fiscal 2025 and fiscal 2026, respectively. Further, we estimate net loan receivables to witness an 8.4% CAGR by fiscal 2026, majorly driven by the LBC deal.
WAFD’s net interest margin (NIM) is likely to expand, with the Federal Reserve expected to keep the interest rates high in the near term. However, the pace of expansion will be subdued due to rising funding costs. The company’s NIM witnessed an increase in fiscal 2022 to 3.16% and further expanded to 3.40% in fiscal 2023 attributed to higher interest rates. Though NIM declined in the first half of fiscal 2024 on a year-over-year basis, higher rates will likely aid the metric in the upcoming quarters. We estimate NIM to be 2.78% this year as higher deposit costs exert pressure on it.
As of Mar 31, 2024, WaFd’s total borrowings were $5.3 billion, up from $3.9 billion as of Sep 30, 2023, attributed to the LBC acquisition. Among the debt incurred from this acquisition, $94 million in senior unsecured term notes are set to mature on Sep 30, 2024. Moreover, at the end of the second fiscal quarter of 2024, the company’s cash and cash equivalents were $1.51 billion. The company’s decent earnings strength enables it to address its near-term debt obligations, even in the event of economic turmoil.
Nonetheless, WaFd has witnessed a persistent increase in operating expenses. The company’s expenses have witnessed a 7.3% CAGR, driven by higher compensation costs and technological investments. The uptrend continued during the first six months of fiscal 2024. Though the LBC acquisition is expected to drive cost reduction to some extent, overall non-interest expenses are likely to remain on the higher side, given the bank’s inorganic expansion strategy, ongoing technological upgrades and inflationary pressure. We estimate total non-interest expenses to record a CAGR of 6.7% over the next three fiscal years.
Additionally, WAFD’s asset quality has been worsening over the past few years. Provision for credit losses rose in fiscal 2021, 2022, and 2023 as the company continued to build reserves to tackle the deteriorating macroeconomic backdrop. Provisions increased further during the first half of fiscal 2024 due to the LBC acquisition. Provisions are likely to remain high going forward, given the expectations of an economic slowdown. We project provisions to be $19.1 million this year.
WAFD currently carries a Zacks Rank #3 (Hold). Over the past six months, shares of the company have lost 21.2% compared with the industry’s decline of 12.5%.
Image Source: Zacks Investment Research
Banking Stocks Worth Considering
Some better-ranked banking stocks worth a look are Northrim BanCorp, Inc. (NRIM - Free Report) and East West Bancorp, Inc. (EWBC - Free Report) .
The Zacks Consensus Estimate for NRIM’s current-year earnings has been revised 12.2% upward in the past 60 days. The company’s shares have lost 6.9% over the past six months. NRIM currently sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks Rank #1 stocks here.
The Zacks Consensus Estimate for EWBC’s current-year earnings has been revised marginally upward in the past two months. The company’s shares have lost 1.1% over the past six months. EWBC currently carries a Zacks Rank #2 (Buy).