A month has gone by since the last earnings report for Webster Financial (WBS - Free Report) . Shares have lost about 6.1% in that time frame, underperforming the S&P 500.
Will the recent negative trend continue leading up to its next earnings release, or is Webster Financial due for a breakout? 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 Q2 Earnings Top Estimates, Revenues Up
Webster Financial delivered a positive earnings surprise of 2% in second-quarter 2019. Earnings per share of $1.05 surpassed the Zacks Consensus Estimate of $1.03. Also, the bottom line increased 22.1% from the prior-year quarter.
Results reflect growth in revenues, with support from higher loans and improving interest margin. Further, fee income showed considerable improvement. Also, the company’s strong capital position was a tailwind. However, higher expenses and provisions were headwinds.
The company reported earnings applicable to common shareholders of $96.2 million, up from $79.5 million in the prior-year quarter.
Revenue Growth Mitigates Higher Expenses, Loans Increase
Webster Financial’s total revenues increased 8.3% year over year to $317.6 million. Also, the top line surpassed the Zacks Consensus Estimate of $314.2 million.
Net interest income grew 7.5% year over year to $241.8 million. Moreover, net interest margin expanded 6 basis points (bps) to 3.63%.
Non-interest income was around $75.9 million, up 10.9% year over year. The upswing mainly resulted from rise in all components except mortgage banking income.
Non-interest expenses of $180.6 million increased slightly from the year-ago quarter. This upswing mainly resulted from higher compensation and benefits expenses, technology and equipment, along with other expenses, partially offset by a fall in marketing and occupancy costs.
Efficiency ratio (on a non-GAAP basis) came in at 56.09% compared with 57.78% as of Jun 30, 2018. A lower ratio indicates improved profitability.
The company’s total loans and leases as of Jun 30, 2019 were $19.27 billion, up 2.4% sequentially. However, total deposits decreased slightly from the previous quarter to $22.6 billion.
Credit Quality: A Mixed Bag
Total non-performing assets were $153.2 million, up 4.9% from the year-ago quarter. In addition, the ratio of net charge-offs to annualized average loans came in at 0.24%, up 5 bps year over year. Also, the provision for loan and lease losses increased13.3% to $11.9 million.
However, allowance for loan losses represented 1.10% of total loans as of Jun 30, 2019, down 5 bps from Jun 30, 2018.
Improved Capital & Profitability Ratios
As of Jun 30, 2019, Tier 1 risk-based capital ratio was 12.15% compared with 11.74% as of Jun 30, 2018. Additionally, total risk-based capital ratio came in at 13.54% compared with 13.21% in the prior-year quarter. Tangible common equity ratio was 8.31%, up from 7.75% as of Jun 30, 2018.
Return on average assets was 1.38% in the reported quarter compared with the year-ago quarter’s 1.22%. As of Jun 30, 2019, return on average common stockholders' equity came in at 13.47%, up from 12.22% as of Jun 30, 2018.
Management expects average loans to be up around 2% on a sequential basis, led by commercial and residential loans.
The average earnings assets are expected to be up about 2% or more sequentially.
NIM is expected to contract 7-10 bps sequentially.
NII is anticipated to be stable. Non-interest income will likely be decline by about $3 million.
Management expects provision for loan losses to increase in the third quarter, considering loan growth, portfolio mix and portfolio quality.
Efficiency ratio is expected to be below 57%.
Management expects the tax rate on a non-FTE basis to be around 21%.
The average diluted share count is estimated to be about 92 million.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed a downward trend in estimates revision.
Currently, Webster Financial has a poor Growth Score of F, however its Momentum Score is doing a lot better with an A. Charting a somewhat similar path, the stock was allocated a grade of B on the value side, putting it in the second quintile 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.
Estimates have been broadly trending downward for the stock, and the magnitude of this revision indicates a downward shift. It's no surprise Webster Financial has a Zacks Rank #4 (Sell). We expect a below average return from the stock in the next few months.