Washington Federal: Well positioned for future growth (NASDAQ:WAFD)

In late summer/early fall 2022, we encouraged our members to start purchasing financial products. Many bank stocks have been understandably in up mode for about three months.higher rate has It’s really pushing up margins and net interest income per loan. Loan demand itself has slowed due to rising interest rates, especially for housing, but credit card balances and personal loans, broadly speaking, remain strong. We believe banks, particularly those with a regional focus, will enjoy a tailwind for many quarters thanks to higher interest rates. Banks are now well positioned for growth over the next few years. Rising interest rates really help banks participating in traditional banking. Here we are referring to a simple model of taking deposits, paying a small interest on those deposits, and lending those deposits to other customers as a term loan. higher rate.

Washington Federal Government begins coverage of bank earnings season (Nasdaq: WAFD) is a slightly obscure bank, but a relatively large regional bank. The bank just reported its earnings for the first quarter of the fiscal year. It’s a bank serving consumers and businesses in the Northwest, with headquarters in Seattle and offices in eight states. It recently made moves to expand operations into California. The company believes 2023 and he thinks 2024 will do well because the interest rates on the loans they make will be much higher. The bank is performing well, paying a decent yield of 2.6% and has room for improvement as its operations and earnings grow. We believe the stock is a buy in the $30-$35 range and believe the market will turn back again and offer better entry opportunities. We like this stock over the medium to long term because of its strong return metrics, loan and deposit growth, and improved asset quality. Let’s talk about the just-reported earnings.

Strong performance in Q1 FY2023

A quick glance reveals that Washington Federal’s key numbers were relatively strong this quarter. There was growth in both the top line and bottom line. The Washington Federal reported his $196.8 million top-line growth, up 28.8%, beating consensus expectations by $3.2 million. Strong year-over-year revenue growth was moderated by higher loan loss reserves. However, some net interest income was solid. Overall, the Washington Federal reports that his net income for the quarter was $79.5 million, up 58%, compared to his net income of $50.3 million in the same period last year. On a per share basis, he was $1.16 in the quarter, down from $0.71 last year. Loans and deposits increased significantly, while expenses and loan loss reserves increased.

Lending growth, deposits slightly down

Loans are up year-to-date and year-over-year. Increasing loans and deposits is the key to bank growth. With total assets of $21.7 billion, he increased from $20.8 billion at the start of the quarter. Total loans were up 5.5% from the beginning of the fourth quarter and now total $17 billion. Loan demand for loan products remained strong despite the rising interest rate environment, although there was very strong demand in the commercial sector. Banks prefer to focus on commercial loans, and these types of loans accounted for 84% of all new originations in the first quarter of the fiscal year. These loans have variable interest rates and are useful in an environment of rising interest rates.

The company prioritizes organic loan growth funded by customer deposits. Total deposits were also strong, but down slightly from the previous quarter, down 0.4%. Total deposits ended the quarter at $16 billion, up 3.3% from the beginning of the year. Securing deposits has become increasingly difficult with rising interest rates and banks competing for customers’ dollars. However, margins should expand as interest rates on new loans are rising, although continued strength in net interest margins can be expected, albeit slightly weighed down by rising cost of funds.

Profit Margins Expanding Despite Rising Capital Costs

So the cost of funds is rising as banks have to pay more for deposits. Our cost of funds almost doubled from last quarter. The cost of funds is up 86 basis points from a year ago. However, net interest margin widened to 3.69% from 2.87% a year ago. That’s because average yields are up 149 basis points from his year ago. New loans are coming in at higher rates, but the impact was somewhat offset by rising cost of funds, while profit margins also widened from 3.64% for him last year. We expect margins to remain well above 3% in the next few quarters. He expects both cost of funds and loan portfolio yields to continue increasing in 2023. Net interest income was $183 million, up $48.7 million or 36.3% from the prior year.

Return metrics are strong

I love looking at bank return metrics. It’s important to know if your return on average assets and return on average equity are improving. These are important measures of efficiency. In fact, his return on average assets expanded to 1.50% from 1.02% a year ago, and his return on average equity increased to 15.15% from 10.12%. In addition, banks have become more efficient, with efficiency rates improving dramatically from 58.64% a year ago to 46.78%. What about asset quality?

Asset quality continues to improve

There is a strong trend here in the asset quality indicator, which is expected to continue as interest rates rise further and new loans are made. As I mentioned earlier, the loan loss reserves increased and that weighed on us. Bad debt reserves were $2.5 million for him compared to $500,000 the year before. Non-performing assets decreased $5.9 million to $38.7 million, or 0.18% of total assets, a significant improvement from 0.21% of total loans at the start of the quarter. Things are getting better and better. The loan loss reserve was $200,000, which was 1.03% of total lending, which was broadly flat from the beginning of the quarter.

Evaluation index

I also like the rating numbers here, but the recent rally in the stock has boosted the ratings. Performance continues to be strong. His stock is at $36.35 at the time of this writing, and tracking 12 months of performance he’s trading at 9.4 times the stock, which in itself is attractive. What about forward base? Well, in 2023 we assume a 15% increase in revenue compared to 2022, which suggests FWD EPS less than 8x.

The stock price is quite attractive even at 1.05 times book value. Most banks are now trading well above book value. That’s not expensive, especially for a growing bank with room to increase its dividend.

take home

It’s been a good quarter and Washington Federal is an attractive stock. We believe there is room for growth in the dividend and we believe margins remain strong. Strong earning power. They are expanding into new markets. Start buying below $35 when the stock returns to the market.