Washington Federal Inc. (WAFD - Analyst Report) has announced the sale of securities and repayment of its long-term debt. The company has decided to restructure its balance sheet is an effort to mitigate the effects of interest rate risk and improve earnings.
Over the last 10 days, to reduce interest rate risk Washington Federal sold $2.4 billion worth of fixed rate mortgage backed securities for a pre-tax gain of $95 million. These securities yielded 3.22% (on annualized basis) in July. Further, the company pre-paid $876 million of costly long-term debt (weighted average rate of 3.94%) at a pre-tax loss of $95 million.
Nevertheless, Washington Federal also bought certain assets - short as well as long term - worth $1.7 billion, having an average weighted yield of 1.85%. Moreover, the company increased the maturity period of an additional $100 million of long-term debt to bring down the weighted average rate to 3.33% from 4.04%.
Similar to Washington Federal, CIT Group Inc. (CIT - Analyst Report) has been constantly restructuring its balance sheet to bring down its cost of capital and improve profitability. CIT announced that it would redeem $681 million of its 7% Series C Notes maturing in 2016 on September 17. With the completion of this redemption, the company would have redeemed or refinanced approximately $31 billion of high-cost long-term debt since 2010.
The ongoing macro economic conditions and low interest rate environment prompted Washington Federal to restructure its balance sheet and enhance capital ratios. This will lower the interest expense burden and fuel net interest income growth. These restructuring initiatives will also assist in fencing margin pressure and provide more financial flexibility.
Management anticipates similar actions to continue in the future. We believe all these initiatives to favor growth going forward.
Washington Federal currently retains a Zacks #3 Rank, which translates into a short-term Hold rating. Considering the fundamentals, we also maintain a long-term ‘Neutral’ recommendation on the stock.