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WAFD's Strategic Initiatives Aid Amid Weak Asset Quality
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WaFd Inc. (WAFD - Free Report) remains well-positioned for growth driven by higher rates, strategic acquisitions, balance sheet restructuring initiatives and decent loan demand. However, a rising expense base and weakening asset quality remain concerns.
WaFd remains focused on its organic growth strategy. The company’s revenues reflected a 7.5% compound annual growth rate (CAGR) over the last five fiscal years (2018-2023). This was primarily driven by a rise in net loan balances, which witnessed an 8.8% CAGR over the same period. During the first nine months of fiscal 2024, revenues dipped on a year-over-year basis while loan balances grew.
This February, the company acquired Luther Burbank Corporation, thus entering the attractive California market. Further, WAFD entered into a commitment to sell off approximately $450 million of single-family mortgage loans, which is expected to be completed in late August.
The company’s top line is expected to witness growth in the light of decent loan demand, balance sheet restructuring efforts and strategic buyouts, and efforts to boost fee income sources. We project total revenues to fall 2.9% this year. Revenues are expected to recover subsequently and rise 9.8% and 9.1% year over year in fiscal 2025 and fiscal 2026, respectively. Moreover, we estimate net loans receivable to reflect a 7.1% CAGR by fiscal 2026.
Higher rates support WaFd’s net interest margin (NIM). The metric is likely to improve in the near term as the central bank is expected to keep interest rates high. Nonetheless, rising funding costs will likely exert pressure on margin expansion. The company’s NIM witnessed improvement from 2.80% in fiscal 2021 to 3.16% in fiscal 2022 and 3.40% in fiscal 2023 amid high interest rates. During the first nine months of fiscal 2024, the NIM contracted by 77 basis points on a year-over-year basis. Our estimate projects NIM to be 2.7% in fiscal 2024 as high deposit costs weigh on it.
As of Jun 30, 2024, WaFd’s total borrowings were $4.08 billion, reflecting a decrease from $5.49 billion as of Mar 31, 2024. This reduction was primarily driven by a $1.6 billion paydown. The company has roughly $3.04 billion in borrowing set to mature within a year. Moreover, at the end of the third quarter of fiscal 2024, cash and cash equivalents were $2.5 billion. Given the decent earnings strength and strong liquidity, the company is likely to address its near-term debt obligations, even if economic turmoil occurs.
WAFD currently carries a Zacks Rank #3 (Hold). Year to date, shares of the company have gained 2.1% against the industry’s decline of 0.8%.
Image Source: Zacks Investment Research
Nonetheless, WaFd has been consistently witnessing an increase in operating expenses. The metric witnessed a 7.3% CAGR over the last five fiscal years (2018-2023), primarily due to higher compensation costs and information technology costs. The uptrend persisted during the first nine months of fiscal 2024. Though the LBC acquisition is expected to mitigate costs, overall non-interest expenses will likely remain elevated amid the ongoing technological upgrades, inflationary pressure, and inorganic expansion strategy. Our estimates suggest total non-interest expenses to witness a CAGR of 8.7% over the next three fiscal years.
WAFD’s deteriorating asset quality is another major concern. Provision for credit losses increased in fiscal 2021, 2022 and 2023 given the company’s efforts to tackle the worsening macroeconomic backdrop through building reserves. Additionally, provisions continued to rise in the first nine months of fiscal 2024 due to LBC acquisition and volatile operating backdrop. Provision levels are likely to stay elevated given the risks of economic slowdown in the near term. We project provisions to be $20 million this year.
The Zacks Consensus Estimate for CPF’s current-year earnings has been revised 10% upward in the past 30 days. The company’s shares have risen 33% in the past six months.
The Zacks Consensus Estimate for BSRR’s current-year earnings has been revised 12.7% upward in the past month. The company’s shares have surged 47% in the past six months.
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WAFD's Strategic Initiatives Aid Amid Weak Asset Quality
WaFd Inc. (WAFD - Free Report) remains well-positioned for growth driven by higher rates, strategic acquisitions, balance sheet restructuring initiatives and decent loan demand. However, a rising expense base and weakening asset quality remain concerns.
WaFd remains focused on its organic growth strategy. The company’s revenues reflected a 7.5% compound annual growth rate (CAGR) over the last five fiscal years (2018-2023). This was primarily driven by a rise in net loan balances, which witnessed an 8.8% CAGR over the same period. During the first nine months of fiscal 2024, revenues dipped on a year-over-year basis while loan balances grew.
This February, the company acquired Luther Burbank Corporation, thus entering the attractive California market. Further, WAFD entered into a commitment to sell off approximately $450 million of single-family mortgage loans, which is expected to be completed in late August.
The company’s top line is expected to witness growth in the light of decent loan demand, balance sheet restructuring efforts and strategic buyouts, and efforts to boost fee income sources. We project total revenues to fall 2.9% this year. Revenues are expected to recover subsequently and rise 9.8% and 9.1% year over year in fiscal 2025 and fiscal 2026, respectively. Moreover, we estimate net loans receivable to reflect a 7.1% CAGR by fiscal 2026.
Higher rates support WaFd’s net interest margin (NIM). The metric is likely to improve in the near term as the central bank is expected to keep interest rates high. Nonetheless, rising funding costs will likely exert pressure on margin expansion. The company’s NIM witnessed improvement from 2.80% in fiscal 2021 to 3.16% in fiscal 2022 and 3.40% in fiscal 2023 amid high interest rates. During the first nine months of fiscal 2024, the NIM contracted by 77 basis points on a year-over-year basis. Our estimate projects NIM to be 2.7% in fiscal 2024 as high deposit costs weigh on it.
As of Jun 30, 2024, WaFd’s total borrowings were $4.08 billion, reflecting a decrease from $5.49 billion as of Mar 31, 2024. This reduction was primarily driven by a $1.6 billion paydown. The company has roughly $3.04 billion in borrowing set to mature within a year. Moreover, at the end of the third quarter of fiscal 2024, cash and cash equivalents were $2.5 billion. Given the decent earnings strength and strong liquidity, the company is likely to address its near-term debt obligations, even if economic turmoil occurs.
WAFD currently carries a Zacks Rank #3 (Hold). Year to date, shares of the company have gained 2.1% against the industry’s decline of 0.8%.
Image Source: Zacks Investment Research
Nonetheless, WaFd has been consistently witnessing an increase in operating expenses. The metric witnessed a 7.3% CAGR over the last five fiscal years (2018-2023), primarily due to higher compensation costs and information technology costs. The uptrend persisted during the first nine months of fiscal 2024. Though the LBC acquisition is expected to mitigate costs, overall non-interest expenses will likely remain elevated amid the ongoing technological upgrades, inflationary pressure, and inorganic expansion strategy. Our estimates suggest total non-interest expenses to witness a CAGR of 8.7% over the next three fiscal years.
WAFD’s deteriorating asset quality is another major concern. Provision for credit losses increased in fiscal 2021, 2022 and 2023 given the company’s efforts to tackle the worsening macroeconomic backdrop through building reserves. Additionally, provisions continued to rise in the first nine months of fiscal 2024 due to LBC acquisition and volatile operating backdrop. Provision levels are likely to stay elevated given the risks of economic slowdown in the near term. We project provisions to be $20 million this year.
Banking Stocks Worth Considering
Some better-ranked banking stocks worth a look are Central Pacific Financial Corp. (CPF - Free Report) and Sierra Bancorp (BSRR - Free Report) , each sporting 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 CPF’s current-year earnings has been revised 10% upward in the past 30 days. The company’s shares have risen 33% in the past six months.
The Zacks Consensus Estimate for BSRR’s current-year earnings has been revised 12.7% upward in the past month. The company’s shares have surged 47% in the past six months.