Westamerica Lowered to Underperform

We have lowered our long-term recommendation on Westamerica Bancorporation (WABC - Analyst Report) from Neutral to Underperform based on the company’s weak fourth-quarter 2011 results and the overall sluggish economic environment.

We anticipate that a weak interest rate environment and low investment returns will restrict any significant bottom-line improvement in the near term. However, we also expect continued synergies from Westamerica’s strong expense discipline, conservative credit culture and a sound balance sheet.

Westamerica’s fourth-quarter earnings were marginally below the Zacks Consensus Estimate. The quarterly results were impacted by a lower top line. However, fall in operating expenses along with improving credit quality were the positives.

Despite the stabilization in the overall credit quality, Westamerica will likely face continued pressure on the asset quality in the upcoming quarters. High unemployment levels and low interest rates are chiefly responsible for this.

Further, as a result of the challenging economic environment, the company’s net interest margin will continue to fall in the near term. We believe that the slow economic recovery and the Federal Reserve’s decision to keep the short-term interest rates low for the next couple of years, will keep the margin under pressure in the upcoming quarters.

On the flip-side, Westamerica continues to have healthy capital position, leading to enhancement of the shareholder value. In October 2011, the company increased its dividend nearly 3% to 37 cents per share.

The dividend payout ratio increased to 47% in 2011 from 45% in 2010 and 34% in 2009. Moreover, the company also repurchased 1.32 million shares valued at $60.6 million in 2011, 533,000 shares valued at $28.7 million in 2010 and 42,000 shares valued at $2.0 million in 2009.

Westamerica remains one of the most profitable banks in the industry, as indicated by its strong return on equity (ROE) and return on assets (ROA). Though both ROE and ROA have declined in 2011 from the prior-year period, they remained well above the peer-group average.

Westamerica currently retains a Zacks #5 Rank, which translates into a short-term Strong Sell rating. However, one of its peers, CVB Financial Corporation (CVBF - Snapshot Report) retains a Zacks #3 Rank (short-term Hold rating).