Organic Growth Aids Webster Financial (WBS), Higher Debt Ails
Webster Financial Corporation’s WBS top-line growth is supported by a rise in net interest income (NII) on high rates and loan growth along with an increase in non-interest income. However, an unsound liquidity position makes it vulnerable to default interest and debt repayments.
Webster Financial has a healthy balance sheet position with its deposits and loan balances rising over the years. This January, the company acquired StoneCastle Insured Sweep, LLC, which performs business as interLINK, to diversify its funding capabilities and add another technology-enabled platform to its system.
Moreover, past acquisitions have driven HSA deposits, thereby increasing total deposits. We believe deposit and loan balances, supporting WBS’ strong balance sheet position, are poised to grow further from strategic buyouts. Management anticipates loan growth to be between 4% and 6% in 2023, with focus on strategic segments. Also, it projects core deposits (including customers certificate of deposits) to grow 8-10% in 2023.
WBS has an impressive revenue growth story as NII and non-interest income have been rising over the years. In fact, high rates and decent loan growth will support NII in the upcoming quarters. Further, its merger deal with Sterling Bancorp has expanded selected commercial lending portfolios, HSA Bank and digital banking offerings, thus diversifying and unlocking new revenue-growth opportunities.
Webster Financial is making efforts to drive cost savings to support its bottom-line growth. Although non-interest expenses have been rising on the back of merger and strategic initiative charges, the trend reversed in the first half of 2023. For 2023, management suggests core expenses to decrease to $1.2-$1.23 billion, with an efficiency ratio in the 40-42% band.
However, WBS’s total debt (comprising long-term debt and federal home loan bank advances) was higher than its cash and due from banks as well as interest bearing deposits as on Jun 30, 2023. Moreover, cash and due from banks have witnessed a volatile trend over the past few years. Hence, we believe that it has a high chance of not been able to meet its debt obligations if the economic situation worsens.
Further, sustainability of Webster Financial’s capital-distribution activities keeps us apprehensive. The last dividend hike by the company was in April 2019. Further, though WBS has a share repurchase plan in place, no shares were repurchased in the first half of 2023.
Webster Financial is likely to prioritize capital utilization for organic growth opportunities, portfolio acquisitions and enhancement of other differentiated business lines over dividend hikes and share buybacks.
The loan portfolio of WBS mostly comprises commercial loans. Since the current rapidly changing macroeconomic backdrop may put some strain on commercial lending, lack of loan portfolio diversification is likely to hurt its financials if the economic situation worsens.
Shares of this Zacks Rank #3 (Hold) companyhave gained 4.3% over the past three months against the industry’s decline of 1.9%.
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Finance Stocks Worth a Look
A couple of better-ranked stocks from the finance space are BBVA USA Bancshares, Inc. BBVA and HSBC Holdings’ HSBC.
BBVA’s current-year earnings estimate has been revised 4.4% upward over the past 30 days. BBVA’s shares have gained 5.3% over the past three months. The stock currently flaunts a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
The consensus estimate for HSBC’s current-year earnings has been revised 3.7% upward over the past 30 days. Over the past three months, HSBC’s share price has decreased 3.8%. The stock currently sports a Zacks Rank #1.
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