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Why is Webster Financial (WBS) Up 11% Since Last Earnings Report?

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A month has gone by since the last earnings report for Webster Financial Corporation (WBS - Free Report) . Shares have added about 11% in that time frame.

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

Webster Financial Q1 Earnings Improve Y/Y, Costs Rise

Webster Financial’s first-quarter 2018 earnings per share of 85 cents surpassed the Zacks Consensus Estimate of 79 cents. Also, it compares favorably with 62 cents earned in the prior-year quarter.

Results reflected growth in revenues. In addition, loan and deposit balances displayed continued improvement, along with a strong capital position. However, higher non-interest expenses remained an undermining factor.

Net income available to shareholders for the first quarter came in at $78.1 million, up 36.3% year over year.

Revenue Growth Offsets Higher Expenses, Loans & Deposits Rise

Webster Financial’s total revenues in the quarter rose 10.6% from the prior-year quarter to $282.9 million. Also, it surpassed the Zacks Consensus Estimate of $275.5 million.

Net interest income grew 11.2% year over year to $214.2 million. Moreover, net interest margin expanded 22 basis points (bps) from the year-ago quarter to 3.44%.

Non-interest income was around $68.7 million, up nearly 9% year over year. The rise was primarily prompted by higher deposit service fees, wealth and investment fees and other income. These were, however, partially offset by a fall in mortgage banking activities, along with loan-related fees.

Non-interest expenses of $171.6 million were up 4.8% from the prior-year quarter. The rise was mainly due to higher compensation and benefits expenses, technology and equipment, along with other expenses, partially offset by a fall in marketing and occupancy costs.

Efficiency ratio came in at 59.76% compared with 62.10% reported as of Mar 31, 2017. A lower ratio indicates improved profitability.  

The company’s total loans and leases as of Mar 31, 2018 were $17.8 billion, up 1.6% sequentially. Further total deposits rose 1.9% from the prior month to $21.4 billion.

Credit Quality: A Mixed Bag

The ratio of net charge-offs to annualized average loans came in at 0.13%, stable year over year. Also, total non-performing assets were $140.1 million, down 21.3% from $177.9 million in the year-ago quarter. Further, the allowance for loan losses represented 1.15% of total loans as of Mar 31, 2018 compared with 1.16% as of Mar 31, 2017.

However, the provision for loan and lease losses rose 4.8% from the year-ago quarter to $11 million.

Improved Capital & Profitability Ratios

As of Mar 31, 2018, Tier 1 risk-based capital ratio was 11.76% compared with 11.42% as of Mar 31, 2017. Also, total risk-based capital ratio came in at 13.25% compared with 12.95% in the prior-year quarter. Tangible common equity ratio was 7.65%, up from 7.34% as of Mar 31, 2017.

The return on average assets was 1.20% in the reported quarter compared with 0.91% in the prior-year quarter. As of Mar 31, 2018, return on average common stockholders' equity came in at 12.15%, up from 9.43% as of Mar 31, 2017.

Outlook

Second-Quarter 2018


Management expects average loans to increase 1.5-2.5% on a sequential basis.

The average earning assets are expected to be up nearly 1-2%.

NIM is expected to expand 6-9 bps sequentially, assuming the full-quarter effect of rate hike in March 2018 and an expected 25 bps hike in June 2018. NII is anticipated to be up $7-$10 million. Non-interest income is expected to rise between $1 million and $2 million, driven by increase in retail and commercial activity.

Management expects provision for loan losses to increase in the second quarter, considering loan growth, portfolio mix, portfolio quality and net charge-offs.

Management anticipates a $2.2-million charge associated with the previously-announced closure of four banking centers. Excluding such charge, efficiency ratio is expected to be below 60%.

Management expects the tax rate to be around 22%.

The average diluted share count is estimated to be about 92.3 million.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in fresh estimates. There have been six revisions higher for the current quarter compared to two lower.

VGM Scores

At this time, WBS has a nice Growth Score of B, a grade with the same score on the momentum front. However, 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 C. If you aren't focused on one strategy, this score is the one you should be interested in.

Zacks style scores indicate that the company's stock is suitable for growth and momentum investors.

Outlook

Estimates have been broadly trending upward for the stock and the magnitude of these revisions looks promising. It comes with little surprise WBS has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.


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