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WAFD Rides on LBC Buyout & Loans Amid Weak Asset Quality

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Steady loan demand, the Luther Burbank Corporation (“LBC”) acquisition, high rates and a strong balance sheet will keep aiding WaFd, Inc.’s (WAFD - Free Report) financials. However, elevated expenses and poor asset quality pose near-term concerns.

In February, WAFD completed the acquisition of LBC, thus entering the lucrative California market. The acquisition will be almost 8% accretive to its earnings in fiscal 2025 and result in some cost savings, too. Given the decent loan demand and expansion efforts, the company’s top line is expected to improve further.

WaFd’s revenues witnessed a CAGR of 7.5% over the last five years (2018-2023), largely driven by improving net loan balances, which saw a CAGR of 8.8%. Per our estimates, total revenues will decline 4.5% this year but rebound and grow 12% and 8.8% year over year in fiscal 2025 and fiscal 2026, respectively.

The Federal Reserve raised rates 11 times from March 2022 to July 2023. With the central bank expected to keep the interest rates high in the near term, WaFd's net interest margin (NIM) is likely to improve, albeit at a slower pace, due to rising funding costs. We project NIM to be 2.80% this year as higher deposit costs weigh on it.

Further, WaFd’s asset quality has weakened over the past few years. Provision for credit losses increased in fiscal 2021, 2022 and 2023 as the company continued to build reserves to combat the challenging macroeconomic backdrop. Going forward, risks of economic slowdown are expected to keep provisions high. We project provisions to be $21.9 million this year.

Also, WAFD has been witnessing a constant rise in non-interest expenses. Over the last five fiscal years (2018-2023), expenses witnessed a CAGR of 7.3%, largely due to higher compensation and information technology costs. While the LBC acquisition is expected to result in cost savings, overall non-interest expenses are expected to remain elevated due to the bank’s inorganic expansion strategy, technology upgrades and inflation. We expect total non-interest expenses to record a CAGR of 6.4% by fiscal 2026.

WAFD currently carries a Zacks Rank #3 (Hold). Shares of the company have risen 2.9% over the past six months compared with the industry’s growth of 11.3%.

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Bank Stocks to Consider

Some better-ranked bank stocks are First BanCorp. (FBP - Free Report) and Bank7 Corp. (BSVN - Free Report) .

Estimates for First BanCorp’s earnings for the current year have moved 6% north in the past 30 days. The company’s shares have risen 18.8% over the past six months. At present, FBP carries a Zacks Rank of 2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Estimates for Bank7’s 2024 earnings have been revised 1.3% upward in the past month. The company’s shares have rallied 21.6% over the past six months. Currently, BSVN also carries a Zacks Rank #2.

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