Webster Financial (WBS) rides on acquisitions despite high leverage


Webster Financial Corporation WBS has experienced inorganic growth through numerous acquisitions, which have also strengthened its balance sheet. However, a precarious liquidity situation makes it vulnerable to default interest and debt repayments.

In February 2022, WBS completed its merger with Bend Financial, which will accelerate HSA Bank’s digital transformation. In January, it acquired Sterling Bancorp in an all-stock transaction, making it one of the largest commercial banks in the North East. The combined company is expected to benefit from loan growth and an industry-leading deposit franchise.

The acquisitions of Bend Financial and Sterling boosted deposits in health savings accounts (HSAs), thereby increasing total deposits. The company has also seen impressive loan growth. We believe deposit and loan balances, which support the company’s strong capital position, are poised to grow further in an improving economic environment. Management expects loan growth of 8-10% for 2022, following the completion of the pound merger, with continued demand for loans in key segments.

An increase in net interest income and fee income is also expected to drive the company’s revenue growth in the period ahead. Additionally, Webster Financial’s merger agreement with Sterling expanded certain commercial loan portfolios, HSA Bank and digital banking offerings. This helped diversify and open up opportunities for revenue growth.

Webster Financial strives to generate savings. Consolidating banking centers and corporate facilities, automating processes, reducing ancillary expenses, and other organizational actions helped the company reduce operating expenses. Webster Financial intends to achieve the target of $60 million each in net operating expense reductions in 2022 and 2023 through the merger with Sterling.

However, Webster Financial’s Net Interest Margin (NIM) trended lower from 2019 to Q1 2022. This was primarily due to the near-zero interest rate environment. Although the Fed has raised interest rates and signaled further such hikes, the overall low interest rate environment should keep NIM growth subdued.

As of March 31, 2022, Webster Financial held a level of indebtedness (including federal bank advances on home loans and long-term debt) of $1.1 billion, while cash and bank receivables were $1.1 billion. $240.4 million. Thus, Webster Financial’s precarious liquidity situation makes it more vulnerable to default interest and debt repayments if the economic situation deteriorates.

Webster Financial’s loan portfolio consists primarily of business and commercial real estate loans. Such exposure can be risky for the company if, alongside the competitive market, the economy poses unprecedented challenges.

Currently, WBS carries a Zacks Rank #3 (Hold). Over the past six months, the company’s shares have fallen 21.5%, more than the 17.1% drop recorded by the industry.

Image source: Zacks Investment Research

Actions worth a look

A few higher ranked stocks in the banking sector are Independent banking company IBCP and Civista Bancshares, Inc. CIVB. IBCP and CIVB currently have a Zacks rank of 2 (buy). You can see the full list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The independent bank’s Zacks consensus estimate for current-year earnings has been revised higher in the past 30 days. Over the past six months, IBCP shares have fallen 18.9%.

Civista Bancshares has also seen an upward revision to 2022 earnings estimates over the past 30 days. Over the past six months, CIVB shares are down 18%.

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