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On Jun 6, 2013, we reiterated our long-term recommendation on Washington Federal Inc. (WAFD - Analyst Report) at Neutral based on its continued capital deployment activities, balance sheet restructuring plans and strategic acquisitions. However, we remain concerned about the company’s considerable exposure to real estate markets.

Why the Neutral Stance?

Washington Federal’s fiscal second-quarter 2013 earnings (ended Mar 31) came in at $0.34 per share, marginally surpassing the Zacks Consensus Estimate by a penny. Better-than-expected earnings were primarily driven by declining credit costs, partially offset by higher operating expenses and lower top line. Moreover, improvement in assets quality and enhanced capital ratios were the tailwinds for the quarter.

Following the second-quarter 2013 earnings (ended Mar 31), the Zacks Consensus Estimate for 2013 went up by a penny to $1.33 over the last 60 days. However, for 2014, the Zacks Consensus Estimate went down by 2.2% to $1.31 per share over the same time frame. Hence, the stock currently has a Zacks Rank #3 (Hold).

Washington Federal’s continuous loan and deposit growth, improved credit quality along with initiatives to improve its balance sheet are expected to prove beneficial for the company going forward. Moreover, over the past few years, Washington Federal has considerably increased its market share through strategic acquisitions.

On the other hand, though the company is enjoying the benefits of lower interest rates, the anticipated improvement in the interest-rate environment is likely to ruin its efforts to strengthen interest margin through deposit re-pricing.

Moreover, Washington Federal’s investment in traditional assets like prime residential mortgage loans and AAA-rated mortgage-backed securities are funded largely by customer deposits with maturities of 1 year or less. These are expected to be marred by rising interest rates, which might also compress the margin between fixed asset returns and variable funding costs, pressurizing profit.

Other Banks to Consider

Some better performing banks include First Pactrust Bancorp, Inc. (BANC - Snapshot Report), Kearny Financial Corp. (KRNY) and Mutualfirst Financial Inc. (MFSF - Snapshot Report). All these carry a Zacks Rank #1 (Strong Buy).

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