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Westamerica Remains at Underperform

WABC COLB

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We have retained our long-term ‘Underperform’ recommendation on Westamerica Bancorp. (WABC - Analyst Report). Though the company’s third quarter results were in line with the Zacks Consensus Estimate, we believe that a weak interest rate environment and low investment returns will restrict any significant bottom-line improvement in the near term.

Westamerica’s quarterly results were adversely impacted by a decline in net interest income. Yet, a fall in non-interest expenses, rise in fee income, improving credit quality and stable capital ratios were among the positives.

As a result of the challenging economic conditions, Westamerica’s net interest margin (NIM) for the nine month ended September 30, 2012 fell 46 basis points from the comparable period last year to 4.89%. Slow economic recovery and the Federal Reserve’s decision to keep the short-term interest rates low through mid-2015 are expected to keep NIM under pressure in the subsequent quarters.

Though the asset quality has been showing improvement over the last few quarters, Westamerica is anticipated to experience credit quality pressures in the upcoming quarters. The main reasons include the strong buoyancy observed in various macro indicators including private consumption, unemployment and interest rates.

Additionally, Westamerica’s average interest earnings assets dipped 0.5% from the prior period to $4.11 billion as of September 30, 2012. Given the weak interest rates and low investment returns amid the ongoing sluggish economic recovery, we do not expect any substantial growth in interest earnings assets over the next several quarters.

However, the scenario is relatively better, given its stable capital and liquidity position. Over the last few years, Westamerica has been continuously enhancing shareholders’ value through dividend hikes and share repurchases. The company repurchased 836,000 shares for $38.7 million in the first nine months of 2012. Moreover, the company’s dividend payout ratio increased to 50% as of September 30, 2012 from 47% in the year-ago period.

Further, Westamerica continues to have a relatively strong capital position. As of September 30, 2012, the company remained well capitalized with its capital ratios remaining substantially above the regulatory requirements. We anticipate the company to continue building capital over the next couple of years, leading to a better financial position.

Westamerica currently retains a Zacks #4 Rank, which translates into a short-term Sell rating. However, one of its peers, Columbia Banking System Inc. (COLB - Snapshot Report) retains a Zacks #3 Rank (short-term Hold rating).

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