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Westamerica Remains Underperform

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We have reiterated our long-term ‘Underperform’ recommendation on Westamerica Bancorp. . Though the company’s first-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 negatively impacted by lower top line. However, a fall in non-interest expenses, improving credit quality and stable capital ratios were among the positives.

As a result of the difficult economic environment, Westamerica’s net interest margin in the first quarter fell 23 basis points on a year-over-year basis to 5.12%. Slow economic recovery and the Federal Reserve’s decision to keep the short-term interest rates low till 2014 are expected to keep the margin under pressure in the next several 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 being observed in macro indicators such as private consumption, unemployment and interest rates.

Additionally, Westamerica’s average interest earnings assets inched up 0.2% sequentially to $4.19 billion as of March 31, 2012. However, we do not expect any significant improvement in interest earnings assets, given the weak interest rates and low investment returns amid the ongoing sluggish economic recovery.

However, the scenario is not that bad given its stable capital and liquidity position. For the last several quarters, Westamerica has been continuously enhancing the shareholder value through dividend hikes and share repurchases. In 2011, the company increased its dividend nearly 3% to 37 cents per share and announced a new repurchase authorization of up to 2 million shares.

Moreover, Westamerica remains one of the most profitable banks in the industry, on the basis of its strong return on equity (ROE) and return on assets (ROA). Though its ROE declined to 15.45% in the first quarter from 16.65% in the prior-year quarter and ROA reduced to 1.68% from 1.84% in the year-ago period, both remained well above the peer group average.

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 - Free Report) retains a Zacks #3 Rank (short-term Hold rating).

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