Webster Financial (WBS) Down 5.5% Since Last Earnings Report: Can It Rebound?

A month has gone by since the last earnings report for Webster Financial (WBS). Shares have lost about 5.5% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Webster Financial due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.

Webster Financial Q4 Earnings Miss on High Expenses

Webster Financial’s fourth-quarter 2019 earnings per share of 96 cents lagged the Zacks Consensus Estimate by a penny. Also, the reported figure declined 8.6% from the prior-year quarter.

Higher non-interest expenses and provision for loan losses, along with contracting NIM, acted as major headwinds. Also, decline in revenues on account of lower interest income affected the results. However, growth in loan and deposit balances as well as impressive capital ratios were positives. Improvement in credit quality came as a tailwind.

The company reported earnings applicable to common shareholders of $88.1 million, down from the prior-year quarter’s $96.7 million.

For full-year 2019, Webster Financial reported net income of $382.7 million or $4.06 per share compared with $360.4 million or $3.81 in 2018.

Revenues Decline, Expenses Rise, Loans & Deposits Improve

Webster Financial’s total revenues decreased 2.6% year over year to $302.2 million. However, the top line missed the Zacks Consensus Estimate of $308.7 million.

In 2019, the company reported revenues of $1.24 billion, which lagged the consensus estimate of $1.25 billion. However, the figure jumped 4.3% year over year.

Net interest income declined 2.5% year over year to $231.3 million.  Moreover, NIM contracted 39 basis points (bps) to 3.27%.

Non-interest income was $70.9 million, down 3.1% year over year. The fall mainly resulted from decline other income.

Non-interest expenses of $179.7 million inched up 2.8% from the year-ago quarter. This upswing mainly resulted from rise in all components except marketing and professional services costs.

Efficiency ratio (on a non-GAAP basis) came in at 58.52% compared with 56.19% as of Dec 31, 2018. A higher ratio indicates lower profitability.

The company’s total loans and leases as of Dec 31, 2019 were $20 billion, up 2.5% sequentially. Also, total deposits increased marginally from the previous quarter to $23.3 billion.

Credit Quality Improves

Total non-performing assets were $157.4 million as of Dec 31, 2019, down 2.6% from the year-ago quarter. In addition, the ratio of net charge-offs to annualized average loans came in at 0.12%, down 9 bps year over year. Also, the provision for loan and lease losses decreased 40% to $6 million as of Dec 31, 2019.

Moreover, allowance for loan losses represented 1.04% of total loans, down 11 bps from Dec 31, 2018.

Improved Capital Ratios, Decline in Profitability Ratios

As of Dec 31, 2019, Tier 1 risk-based capital ratio was 12.23% compared with 12.16% as of Dec 31, 2018. Additionally, total risk-based capital ratio came in at 13.55% compared with the prior-year quarter’s 13.63%. Tangible common equity ratio was 8.39%, up from 8.05%.

Return on average assets was 1.19% in the reported quarter compared with the year-ago quarter’s 1.44%. As of Dec 31, 2019, return on average common stockholders' equity came in at 11.6%, down from 14.31%.

Outlook

On CECL adoption, effective Jan 1, management expects the day 1 impact to increase the current allowance by around 30%.bThe impact will be recorded as a charge to capital and will reduce common equity Tier 1 capital between 20 and 25 basis points but increase total risk-based capital by about 5 basis points. Regarding the day 2 impacts, quarterly CECL allowance will be based on loan growth and mix, asset quality and the macroeconomic environment. Given stable metrics, management expects allowance coverage ratio to remain around 30 basis points higher than fourth-quarter 2019 level.

First-Quarter 2020

Management expects average loans to be up around 1-2% on a sequential basis, led by commercial real estate and residential loans.

The average earnings assets are expected to grow about 1% sequentially.

On stable rates, NIM is expected to expand 1-3 bps sequentially.

Notably, if interest rates remained unchanged, NII is expected to increase $2-$4 million.

Non-interest income will likely be up $1-$3 million.

Management expects provision for loan and lease losses under CECL to be driven by loan composition and forecasted economic conditions.

Efficiency ratio is expected to be around 58%.

Management expects the tax rate on a non-FTE basis to be around 22-23%.

2020 Outlook

Management anticipates net interest income to meet or exceed $955 million generated in 2019 based on the current asset growth forecast.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in estimates revision.

VGM Scores

At this time, Webster Financial has a poor Growth Score of F, however its Momentum Score is doing a bit better with a D. However, the stock was allocated a grade of B on the value side, putting it in the second quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of D. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Webster Financial has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.

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