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Washington Federal (WAFD) Banks on Loan Growth, Costs High

Zacks

Washington Federal, Inc. WAFD is well positioned to benefit from continued improvement in loan balances and a rising rate scenario. Moreover, given a solid balance sheet position, the company is expected to continue enhancing shareholder value through efficient capital deployment activities.

However, higher expenses and exposure to risky loan portfolios remain major near-term concerns for the company.

Probably because of the drawbacks, the company’s shares have lost 3.7% so far this year, against the industry’s growth of 3.3%.



Also, the company’s earnings estimates for fiscal 2018 have remained unchanged in the last 30 days. Thus, the stock currently carries a Zacks Rank #3 (Hold).

Washington Federal remains focused on its organic growth strategy. The company’s revenues have witnessed a CAGR of 3.5% over the last four fiscal years (2014-2017), mainly driven by growth in loan balances. With rise in loan demand, along with higher interest rates, the company’s top line is expected to improve further in the future.

Also, with the improvement in the rate scenario, Washington Federal’s margin pressure seems to be easing gradually. Its net interest margin (NIM) increased to 3.13% in fiscal 2017 from 3.11% in fiscal 2016 and 3.08% in fiscal 2015. In fact, the economic recovery, rising loan demand and higher interest rates are expected to lead to a further increase in margins in the quarters ahead.

Furthermore, the company’s earnings strength and strong balance sheet position, along with its trend of returning capital to shareholders, should boost investors’ confidence in the stock. Its deal, to acquire Anchor Bancorp, is also expected to be accretive to its earnings.

However, mounting operating expenses are likely to hurt bottom-line growth to quite an extent. Over the last fiscal six years (2012-2017), expenses have risen at a CAGR of 10.1%, mainly due to higher compensation costs and information technology expenses. Expenses are likely to continue increasing, owing to integration charges related to Anchor Bancorp deal, the bank’s branch acquisition strategy and technology upgrades.

Moreover, Washington Federal’s significant exposure to risky loan portfolios remains a major concern. As of Mar 31, 2018, 64% of the company’s loan originations comprised commercial loans and the remaining 36% comprised consumer loans. Though the company has been reducing its exposure to these loan portfolios, we do not anticipate a significant improvement any time soon.

Stocks to Consider

A few better-ranked stocks in the finance space are Farmers Capital Bank Corporation FFKT, Associated Banc-Corp ASB and Lazard Ltd LAZ.

In the last 60 days, Farmers Capital witnessed an upward earnings estimate revision of 5.9% for the current year. Additionally, the stock has gained 32.3% in the past year. It currently sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Associated Banc-Corp also sports a Zacks Rank of 1. Its earnings estimates for the current year have been revised 11.4% upward over the last 60 days. Its shares have gained 11.3% in the past year.

Lazard currently has a Zacks Rank #2 (Buy). Its earnings estimates for the current year have been revised 10.6% upward over the last 60 days. The company’s shares have increased 20.8% in a year’s time.

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