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Why Is Webster Financial (WBS) Down 1.5% Since its Last Earnings Report?

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It has been about a month since the last earnings report for Webster Financial Corporation (WBS - Free Report) . Shares have lost about 1.5% in that time frame, outperforming the market.

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

Webster Financial Q4 Earnings Improve Y/Y, Costs Rise

Webster Financial reported fourth-quarter 2017 adjusted earnings per share of 71 cents, which compared favorably with 60 cents earned in the prior-year quarter. The Zacks Consensus Estimate for the quarter’s earnings was 67 cents.

Results reflected growth in revenues. Also, loan and deposit balances showed continued improvement along with a strong capital position. However, lower fee income and higher non-interest expenses were the undermining factors.

After considering the net benefit of $7.8 million from tax legislation, net income available to shareholders for the fourth quarter came in at $69.9 million, up 21.2% year over year.

For full-year 2017, Webster Financial reported net income available to common shareholders of $255.4 million or $2.67 per share compared with $198.4 million or $2.16 per share as of Dec 31, 2016.

Revenue Growth Offsets Higher Expenses

Webster Financial’s total revenues in the quarter rose 5.9% from the prior-year quarter to $271 million. The Zacks Consensus Estimate was $272 million.
For 2017, the company reported revenues of $1.06 billion, up 7.4% on a year-over-year basis.

Net interest income grew 10.6% year over year to $204.9 million. Moreover, net interest margin increased 22 basis points (bps) from the year-ago quarter to 3.33%.

Non-interest income was around $66 million, down nearly 6.5% year over year. The decline was primarily prompted by a fall in mortgage banking activities along with other income. These were, however, partially offset by higher deposit service fees and wealth and investment fees.

Non-interest expenses of $161.8 million climbed 3.7% from the prior-year quarter. The rise was mainly due to higher compensation and benefits expenses, technology and equipment along with other expenses, partially offset by a fall in marketing and occupancy costs.

Efficiency ratio came in at 59.48% compared with 63.13% as of Dec 31, 2016. A lower ratio indicates improved profitability.   

The company’s total loans and leases as of Dec 31, 2017 were $17.5 billion, up slightly sequentially. Further total deposits rose marginally from the prior month to $21 billion.  

Credit Quality: A Mixed Bag

The ratio of net charge-offs to annualized average loans came in at 0.34%, up 19 bps from the prior-year quarter. Also, the provision for loan and lease losses rose 4% from the year-ago quarter to $13 million.

Allowance for loan losses represented 1.14% of total loans as of Dec 31, 2017, flat year over year. Total nonperforming loans were $126.6 million, down 5.5% from $134 million in the year-ago quarter.

Improved Capital & Profitability Ratios

As of Dec 31, 2017, Tier 1 risk-based capital ratio was 11.91% compared with 11.19% as of Dec 31, 2016. Also, total risk-based capital ratio came in at 13.40% compared with 12.68% in the prior-year quarter. Tangible common equity ratio was 7.67%, up from 7.19% as of Dec 31, 2016.

The return on average assets was 1.05% in the reported quarter compared with 0.89% in the prior-year quarter. As of Dec 31, 2017, return on average common stockholders' equity came in at 10.66%, up from 9.26% as of Dec 31, 2016.

Outlook

First-quarter 2018

Management expects average loans to increase 1-2% on a sequential basis.

The average earning assets are expected to grow nearly 1%.

NIM is expected to expand 5-7 bps sequentially, assuming a rate hike in March 2018. NII is anticipated to grow $5-$7 million. Non-interest income is expected to rise between $1 million and $2 million, driven by HSA Bank and increase in commercial activity.

Management expects provision for loan losses to increase in the first quarter, considering loan growth, portfolio mix and net charge-offs.

Efficiency ratio is expected to be around 60%.

Management expects the tax rate to be around 21%.

The average diluted share count is expected to be about 92.5 million.

Note: The EPS data mentioned in the text of this section differs from the rest of report due to the difference in calculation or consideration of one-time items.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in fresh estimates. There have been three revisions higher for the current quarter compared to one lower. While looking back an additional 30 days, we can see even more upward momentum. There have been seven moves up in the last two months. In the past month, the consensus estimate has shifted by 7% due to these changes.

VGM Scores

At this time, WBS has a subpar Growth Score of D, however its Momentum is doing a lot better with a B. Charting a somewhat similar path, the stock was also allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.

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

Our style scores indicate that the stock is more suitable for momentum investors than value investors.

Outlook

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


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