Washington Federal (WAFD) Ratings Affirmed, Outlook Downgraded
Washington Federal, Inc. WAFD and its federally insured savings and loan association subsidiary, WaFd Bank’s ratings have been affirmed by Moody’s Investors Service, a division of Moody’s Corporation MCO. However, the rating outlook on both Washington Federal and WaFd Bank has been downgraded to negative from stable.
Washington Federal and WaFd Bank’s issuer ratings have been affirmed at Baa1. WaFd Bank has a long-term deposit rating of A1, while its short-term deposit rating is affirmed at Prime-1. The bank’s standalone baseline credit assessment (BCA) has been affirmed at a3.
Rationale Behind Ratings Affirmation
Continued improvement in WAFD’s funding profile, its robust asset quality and a respectable level of profitability achieved in 2021 (which did not benefit from reserve releases, unlike most peers) are the reasons behind the ratings affirmation.
Looking at WAFD’s funding profile, its Federal Home Loan Bank advances were 8.6% of total assets as of Dec 31, 2021, down from 14.4% on Sep 30, 2020. Over the same period, deposits increased from 73% to 80% of the total balance sheet. In fact, Moody’s expects that Washington Federal will further lower its reliance on market funding in the coming years. Moody’s is also of the opinion that the company’s deposit gathering capabilities will benefit from the recent introduction of enhanced digital banking capabilities.
Per Moody’s, WAFD has strong credit underwriting. The company’s credit costs continue to be extremely low. In 32 of the last 34 quarters, WAFD recorded net recoveries. However, being a concentrated real estate lender, the bank is exposed to a scenario of protracted downward pressure on commercial property values if the anticipated interest rate hikes lead to an economic downturn.
Apart from the above-mentioned positives, the termination of the February 2018 Consent Order for Anti-Money Laundering and Bank Secrecy Act deficiencies (for which WAFD had agreed to pay a civil money penalty of $2.5 million) by the Office of the Comptroller of the Currency reflects favorably on Washington Federal’s operational risk profile.
Reasons for Change in Outlook
The downgrade in outlook to negative from stable reflects the significant reduction in Washington Federal’s 2021 capitalization, which weakened its protection against unexpected losses and increased its concentration risk.
WAFD’s Moody’s-calculated tangible common equity (TCE) to risk-weighted assets ratio declined from 12.9% as of Sep 30, 2020, to 9.5% on Sep 30, 2021. The reduction means that the bank now has a reduced capacity to absorb unexpected losses.
The reduction in capitalization also means increased concentration risk. WAFD’s commercial real estate (“CRE”) portfolio was 4.1X its TCE on Sep 30, 2021, up from less than 3.0X a year ago. This level of CRE concentration is the highest among similarly-rated banks in the United States.
When Can the Ratings be Upgraded?
Because of a negative outlook, Washington Federal’s ratings cannot be upgraded in the next 12-18 months. Nevertheless, a change in outlook to stable is possible if the company’s TCE to risk-weighted assets ratio goes up to 10% and remains at least at that level. An upgrade in outlook is also possible if the company’s credit costs remain low or if its profitability improves, along with higher interest rates.
What Factors Can Lead to a Downgrade in Ratings?
A rating downgrade can happen if WAFD’s TCE to risk-weighted assets ratio falls below 10% or if the company has a larger CRE concentration along with rising credit costs and a decline in profitability.
Price Performance & Zacks Rank
Washington Federal’s shares have rallied 18.1% in the past year compared with 23.8% growth of the industry.
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Currently, Washington Federal carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Rating Action by Moody’s on Other Firms
In December, Moody’s affirmed the ratings of Associated Banc-Corp ASB and its banking subsidiary Associated Bank, N.A. Their outlook was also re-affirmed at negative by the rating agency.
Associated Banc-Corp’s standalone BCA was affirmed at a3, while its issuer rating for long-term senior unsecured notes was affirmed at Baa1.
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