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Webster Financial (WBS) Up 5.7% Since Last Earnings Report: Can It Continue?

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A month has gone by since the last earnings report for Webster Financial (WBS - Free Report) . Shares have added about 5.7% in that time frame, outperforming the S&P 500.

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

Webster Financial Q4 Earnings Top on High Mortgage Banking

Webster Financial reported fourth-quarter 2020 adjusted earnings per share of 99 cents, which surpassed the Zacks Consensus Estimate of 72 cents. The reported figure excluded noteworthy items such as charges related to strategic optimization initiatives.

Higher fee income drove the results. Moreover, growth in deposit balances as well as impressive capital ratios were positives. Also, the reserve release during the quarter was a tailwind. However, elevated non-interest expenses, along with lower NIM, were key concerns. Also, decline in revenues on account of lower interest income affected the bank’s performance.

The company reported earnings applicable to common shareholders of $57.7 million, down from the prior-year quarter’s $88.1 million.

In full-year 2020, Webster Financial reported net income of $220.6 million or $2.35 per share compared with $382.7 million or $4.06 in 2019.

Revenues Decline, Expenses Rise, Deposits Improve

In 2020, the company reported revenues of $1.18 billion, which matched with the consensus estimate. However, the figure declined 5.1% year over year.

Webster Financial’s total revenues in the quarter decreased 2.8% year over year to $293.7 million. However, the top line surpassed the Zacks Consensus Estimate of $291.2 million.

Net interest income declined 6.2% year over year to $216.9 million.  Moreover, NIM contracted 44 basis points (bps) to 2.83%.

Non-interest income was $76.8 million, up 8.2% year over year. This rise mainly resulted from strong mortgage banking and other income.

Non-interest expenses of $219.5 million flared up 22.1% from the year-ago quarter. This upswing chiefly resulted from rise in almost all components except marketing, deposit insurance and other costs.

Efficiency ratio (on a non-GAAP basis) came in at 60.27% compared with 58.52% as of Dec 31, 2020. A higher ratio indicates lower profitability.

The company’s total loans and leases as of Dec 31, 2020 were $21.6 billion, slightly down sequentially. However, total deposits inched up 1.5% from the previous quarter to $27.3 billion.

Credit Quality: A Mixed Bag

Total non-performing assets were $170.3 million as of Dec 31, 2020, up 8.2% from the year-ago quarter. Moreover, allowance for loan losses represented 1.66% of total loans, up 62 bps from Dec 31, 2019. Also, a benefit to provision for loan and lease losses of $1 million were recorded compared with $6 million in the prior-year quarter.

Yet, the ratio of net charge-offs to annualized average loans came in at 0.17%, up 5 bps year over year.

Steady Capital and Profitability Ratios

As of Dec 31, 2020, Tier 1 risk-based capital ratio was 11.99% compared with 12.22% as of Dec 31, 2019. Additionally, total risk-based capital ratio was 13.59% compared with the prior-year quarter’s 13.55%. Tangible common equity ratio was 7.9%, down from 8.39%.

Return on average assets was 0.73% in the reported quarter compared with the year-ago quarter’s 1.19%. As of Dec 31, 2020, return on average common stockholders' equity was 7.51%, down from 11.6%.

Outlook

Looking forward to first-quarter 2021, management expects modest loan growth. Also, NIM is anticipated to be influenced by the rate environment and PPP forgiveness. With rates at current level, NII might remain stable sequentially.

Non-interest income is expected to be modestly down sequentially due to lower loan-related and mortgage banking fees.

The company is targeting 8-10% net reduction in non-interest expenses in 2021 through rationalizing its banking center network, consolidating corporate facilities, organizational actions, process optimization and ancillary spend reduction.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in estimates revision.

VGM Scores

Currently, Webster Financial has a poor Growth Score of F, however its Momentum Score is doing a bit better with a D. Following the exact same course, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.

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

Outlook

Estimates have been broadly trending upward for the stock, and the magnitude of these revisions looks promising. It comes with little surprise Webster Financial has a Zacks Rank #1 (Strong Buy). We expect an above average return from the stock in the next few months.


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