Webster Financial: Loan Growth Slows But Management Remains Optimistic

Founded back in 1935, Webster Financial Corporation (NYSE:WBS) operates as a bank holding company and is headquartered in Stamford, Connecticut. Far from its all-time high of $65 per share, it is gradually making up for lost ground. However, in Q4 2023 it failed to meet analysts’ expectations in terms of EPS and revenue:

• Q4 Non-GAAP EPS of $1.46 missed by $0.02.
• Revenue of $634.8M (-9.9% Y/Y) missed by $44.32M.

Loans and securities portfolio

Total loans amounted to $50.72 billion, up 1.90% from last year and 1.30% from last quarter. This is rather small growth and influenced by the Fed’s monetary policy. In fact, current market rates are disincentivizing both households and businesses from accessing credit. The only segment that achieved both year-over-year and quarter-over-quarter growth is CRE loans, +7.84% and +2.79%, respectively. All others except commercial non-mortgage declined on a quarterly basis, signaling that the effects of monetary policy are gradually affecting the real economy. The fact that rates are no longer rising does not mean that the worst is behind us; in fact, what weakens the economy most is high rates for a long time, and we are just now experiencing the first consequences.

Yet, although the premise is not rosy, WBS’s guidance points to loan growth between 5-7%, which is quite contrary to what has been shown in recent quarters. In my opinion, this guidance may be too optimistic; after all, the Fed Funds Rate will remain high in 2024. Anyway, CEO John Ciulla believes in the potential of commercial loans:

The majority of the originations in the loan growth will come in those commercial categories, which will be non-office CRE, commercial, public sector finance, sponsor and specialty, general C&I in market and fund banking. Those are the areas we obviously have good equipment, finance, and ABL capabilities, too. But I would say those core commercial categories where the growth is.

Let us now turn to the securities portfolio since for WBS it represents a crucial component of its total assets, as much as 21.39%.

Compared to Q3 2023, the securities portfolio increased by $1.50 billion and reached $16 billion. This improvement was due to two factors:

• $400 million due to appreciation in the value of the AFS portfolio. Treasury rates fell in Q4 2023 and this reduced unrealized losses.
• $1.10 billion for the purchase of new securities at current market rates. The purpose is to reduce asset sensitivity.

Overall, the portfolio yield has reached 3.35% and thus is close to current market rates. Last quarter it was 26 basis points lower. In contrast, the duration remains unchanged at 4.4 years.

Regarding the future prospects of the securities portfolio, management reiterated that it plans to increase it further. Securities worth $300 million will mature in the next quarter, and the entire amount will be reinvested in new securities. Basically, while many regional banks are trying to dispose of securities as soon as possible, WBS is doing the opposite. In itself, I find this a reasonable choice; after all, Treasury rates are set to fall in the next few years, and reinvesting maturing securities today will have a positive impact on NIM. In addition, demand for loans is rather sluggish, and accumulating too much liquidity is a detriment to the bank since it is already well capitalized.

All capital ratios are well above the minimum threshold as well as improved from last year.

Deposits e net interest margin

Total deposits reached $60.78 billion, up 0.70% from the previous quarter and 12.50% from last year. The cost of total deposits again increased, by 2.15% compared to 1.96% in the previous quarter.

In any case, it remains a rather low rate compared to other regional banks, some of which are even close to 4%. The gradual shift from low interest-bearing deposits to CDs is likely to continue in the coming quarters, but the worst should be behind us.

I don’t see anything significant. I think you’ll still see a little bit more of deposits flow from low-interest-bearing type of money market and savings accounts into CDs to the extent people or our clients think that rates are going to drop, they might want to go a little longer on their investments and things like that, we have continued to see that. But I think those are very basic dynamics.

CFO Glenn MacInnes

In Q4 2023, the increasing weight of the cost of interest-bearing liabilities (+14 basis points) outweighed the increase in the yield on interest-earning assets (+5 basis points). The result was a NIM of 3.42%, declining by 7 basis points.

According to management assumptions, by 2024 the NIM is expected to be around 3.45%, with a potential upside depending on various factors. In addition to opportunities for repricing the securities portfolio and loans, much will depend on the refinancing of CDs. CDs worth $4 billion will mature in the next two quarters and the rate at which they are refinanced will greatly affect the NIM.

As for NII, in Q4 2023 it was $571 million, a slight decline from both Q3 2023 and Q4 2022. The expected NII for the entire FY2024 is between $2.40-$2.45 billion: this estimate discounts four rate cuts starting in May. If the cuts were more than expected, this would have a negative impact on NII. In any case, management has estimated an NII of $20-$30 million less in case of six cuts, thus a not too unfavorable outcome.

Conclusion

Webster Financial is experiencing a slowdown in loan growth, particularly on the consumer side. Despite this, management is positive about 2024 and expects growth between 5-7%, driven mainly by the commercial side. The securities portfolio is taking an increasingly important role in total assets, and securities maturing in the next quarter will be reinvested at current market rates. Finally, capital ratios are excellent and buybacks could resume from the second half of 2024.

Overall, although analysts’ estimates have not been beaten, this quarterly does not look so bad to me. However, the market could punish the coming quarters if loan growth expectations are not met. I personally have some doubts that demand for credit will recover.