Back to top

Balanced View on Washington Federal

Read MoreHide Full Article

On Mar 18, 2013, we reaffirmed our Neutral recommendation on Washington Federal Inc. (WAFD - Free Report) on its better-than-expected results, meaningful capital deployment actions and robust asset quality. Though the company is enjoying the benefits of lower rates, the benefits of deposit repricing will be badly affected once the rates start rising.

Why the Neutral Stance?

Washington Federal’s fiscal first quarter (ended Dec 31) earnings per share beat the Zacks Consensus Estimate by a penny. This also marked an improvement from the year-ago earnings. Constantly declining credit costs primarily drove the results. However, higher operating expenses and lower top line were the headwinds.

Further, in the past 60 days, none of the estimates has moved up, keeping the Zacks Consensus Estimate unchanged for 2013. Estimates for 2014 have also remained almost flat over the same period. In addition, over the past 4 quarters, the average earnings surprise has been a decent 4.9% for the company.

Washington Federal’s credit quality continues to improve with the contraction of nonperforming assets and net charge-offs. Further, management expects credit costs to continue declining. We anticipate the credit quality to continue improving in the subsequent quarters with the gradual recovery of the housing sector. Moreover, management’s efforts to enhance shareholder value through regular dividend hikes and buybacks make it an asset for yield seeking investors.

Yet, the ill effects of the stabilization of interest rates make us wary. The anticipated improvement in the interest-rate environment is likely to ruin its efforts to strengthen interest margin through deposit re-pricing. Also, Washington Federal’s investment in traditional assets like prime residential mortgage loans and AAA-rated mortgage-backed securities, which are funded largely by customer deposits with maturities of 1 year or less, will be marred by rising interest rates. Improvement in low interest rate scenario has the potential to compress the margin between fixed asset returns and variable funding costs, pressurizing the profit.

Further, we remain concerned about the company’s considerable exposure to real estate markets, which are highly perilous.

Other Stocks to Consider

Other stocks that are performing better than Washington Federal include First Defiance Financial Corp. (FDEF - Free Report) , Meta Financial Group, Inc. (CASH - Free Report) and Flagstar Bancorp Inc. (FBC - Free Report) . All these carry a Zacks Rank #1 (Strong Buy).

More from Zacks Analyst Blog

You May Like