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Rising NII & Fee Income Aid Webster Financial Amid High Costs
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Webster Financial Corporation’s (WBS - Free Report) revenue strength, increasing net interest income (NII) and diversified fee income sources, enhanced by strategic acquisitions, support its growth prospects. However, elevated expense levels and high debt remain areas of concern.
Tailwinds for WBS
Revenue Strength: Webster Financial has an impressive revenue growth story. NII and non-interest income witnessed a compound annual growth rate (CAGR) of 25.1% and 2.5%, respectively, over the last four years (2019-2023). Both metrics declined in the first half of 2024. Nonetheless, NII is expected to witness improvement in the upcoming period as the Federal Reserve has cut interest rates, which will help stabilize funding costs over time. Further, the company's efforts to strengthen its balance sheet and reposition of its securities portfolio will drive NII growth.
Additionally, the bank’s joint venture with Marathon Asset will add a new source of fee income, which will likely support Webster Financial’s non-interest income growth in the coming months.
Inorganic Growth Moves: Webster Financial is focused on growing inorganically. The company’s acquisition of Ametros in January 2024 is expected to enhance its expertise in healthcare financial services and provide a new source of non-interest income.
In 2022, Webster Financial merged with Sterling Bancorp, which has expanded its selected commercial lending portfolios, HSA Bank and digital banking offerings. These have helped in diversification and the unlocking of new revenue-growth opportunities. We believe these strategic pacts to aid Webster Financial's growth in the upcoming period.
Balance Sheet Strength: Webster Financial has a healthy balance sheet position. Deposits and loans recorded a four-year (2019-2023) CAGR of 27.1% and 26.1%, respectively. The uptrend continued for both metrics in the first half of 2024.
Further, the acquisition of Ametros will benefit the company by diversifying its funding capabilities through the addition of low-cost and long-duration deposits. Management expects Ametros’ deposits to witness a 25% CAGR over the next five years. Going forward, growth in deposit and loan balances will keep supporting the company’s financials.
Challenges for WBS
Rising Cost Base: Elevated non-interest expenses due to incremental costs related to the acquired businesses and higher employee compensation and service contract expenses are a major concern for Webster Financial. The metric saw a CAGR of 18.6% over the last four years (2019-2023). Although the trend reversed in the first half of 2024, the company’s ongoing investments in talent, operational support and technology are likely to keep the expense base under pressure in the short term.
Expense Growth
Image Source: Zacks Investment Research
Unmanageable Debt Level: As of June 30, 2024, Webster Financial’s total debt (comprising long-term debt and federal home loan bank advances) was $3.72 billion. In contrast, cash and due from banks, as well as interest-bearing deposits, aggregated $1.58 billion.
Moreover, cash and due from banks have witnessed a volatile trend over the past few years. Hence, we believe that Webster Financial might not be able to meet its debt obligations if the economic situation worsens.
In the past six months, shares of WBS have lost 7.3% against the industry's growth of 13.4%.
The Zacks Consensus Estimate for BWB’s 2024 earnings has moved 1% north over the past seven days. In the past six months, shares of BWB have risen 21.3%.
The Zacks Consensus Estimate for CNOB’s 2024 earnings has moved upward 1.1% over the past 30 days. Its shares have risen 30% in the past six months.
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Rising NII & Fee Income Aid Webster Financial Amid High Costs
Webster Financial Corporation’s (WBS - Free Report) revenue strength, increasing net interest income (NII) and diversified fee income sources, enhanced by strategic acquisitions, support its growth prospects. However, elevated expense levels and high debt remain areas of concern.
Tailwinds for WBS
Revenue Strength: Webster Financial has an impressive revenue growth story. NII and non-interest income witnessed a compound annual growth rate (CAGR) of 25.1% and 2.5%, respectively, over the last four years (2019-2023). Both metrics declined in the first half of 2024. Nonetheless, NII is expected to witness improvement in the upcoming period as the Federal Reserve has cut interest rates, which will help stabilize funding costs over time. Further, the company's efforts to strengthen its balance sheet and reposition of its securities portfolio will drive NII growth.
Additionally, the bank’s joint venture with Marathon Asset will add a new source of fee income, which will likely support Webster Financial’s non-interest income growth in the coming months.
Inorganic Growth Moves: Webster Financial is focused on growing inorganically. The company’s acquisition of Ametros in January 2024 is expected to enhance its expertise in healthcare financial services and provide a new source of non-interest income.
In 2022, Webster Financial merged with Sterling Bancorp, which has expanded its selected commercial lending portfolios, HSA Bank and digital banking offerings. These have helped in diversification and the unlocking of new revenue-growth opportunities. We believe these strategic pacts to aid Webster Financial's growth in the upcoming period.
Balance Sheet Strength: Webster Financial has a healthy balance sheet position. Deposits and loans recorded a four-year (2019-2023) CAGR of 27.1% and 26.1%, respectively. The uptrend continued for both metrics in the first half of 2024.
Further, the acquisition of Ametros will benefit the company by diversifying its funding capabilities through the addition of low-cost and long-duration deposits. Management expects Ametros’ deposits to witness a 25% CAGR over the next five years. Going forward, growth in deposit and loan balances will keep supporting the company’s financials.
Challenges for WBS
Rising Cost Base: Elevated non-interest expenses due to incremental costs related to the acquired businesses and higher employee compensation and service contract expenses are a major concern for Webster Financial. The metric saw a CAGR of 18.6% over the last four years (2019-2023). Although the trend reversed in the first half of 2024, the company’s ongoing investments in talent, operational support and technology are likely to keep the expense base under pressure in the short term.
Expense Growth
Image Source: Zacks Investment Research
Unmanageable Debt Level: As of June 30, 2024, Webster Financial’s total debt (comprising long-term debt and federal home loan bank advances) was $3.72 billion. In contrast, cash and due from banks, as well as interest-bearing deposits, aggregated $1.58 billion.
Moreover, cash and due from banks have witnessed a volatile trend over the past few years. Hence, we believe that Webster Financial might not be able to meet its debt obligations if the economic situation worsens.
In the past six months, shares of WBS have lost 7.3% against the industry's growth of 13.4%.
Image Source: Zacks Investment Research
At present, WBS carries a Zacks Rank #3 (Hold).
Stocks to Consider
Some better-ranked stocks from the banking space are Bridgewater Bancshares, Inc. (BWB - Free Report) and ConnectOne Bancorp, Inc. (CNOB - Free Report) , each sporting a Zacks Rank #1 (Strong Buy) at present. You can see the complete list of today’s Zacks #1 Rank stocks here.
The Zacks Consensus Estimate for BWB’s 2024 earnings has moved 1% north over the past seven days. In the past six months, shares of BWB have risen 21.3%.
The Zacks Consensus Estimate for CNOB’s 2024 earnings has moved upward 1.1% over the past 30 days. Its shares have risen 30% in the past six months.