WSBC - WesBanco: Attractive Valuation With A Stable Earnings Outlook

2023-11-16 15:05:40 ET

Summary

• The margin declined more than expected in the last two quarters. Therefore, I’ve reduced my margin estimate for the full year.
• The loan growth outlook remains positive because of the management’s initiatives.
• The December 2024 target price suggests a high upside from the current market price. Further, WSBC is offering a 5.2% dividend yield.

Earnings of WesBanco, Inc. ( WSBC ) will most probably remain flattish next year as loan growth and non-interest income growth will counter the effect of higher operating expenses. Overall, I’m expecting the company to report earnings of $2.57 per share for 2023 and $2.56 per share for 2024. Compared to my last report on the company, I’ve reduced my earnings estimate for 2023 because the margin dipped more than expected over the last two quarters. Next year’s target price suggests a high upside from the current market price. Further, the company is offering an attractive dividend yield. Therefore, I’m maintaining a buy rating on WesBanco, Inc.

Margin’s Downtrend Likely to End Soon

WesBanco’s net interest margin declined by a cumulative 46 basis points in the first nine months of this year, which was much worse than my previous expectation given before the release of the second quarter results. This significant decline was due to:

1. Increasing deposit costs, and
2. Continued remix from non-interest-bearing deposits into higher tier money market and certificate of deposit accounts. Non-interest-bearing deposits slipped to 31.9% of total deposits by the end of September 2023 from 35.8% at the end of December 2022.

I’m expecting the adverse deposit migration to slow down in the fourth quarter of the year because the up-rate cycle has apparently ended. Every rate hike provided depositors with an incentive to shift their funds to a higher-tier account. Now that the interest-rate environment is calmer, the migration should also slow down.

Therefore, I’m expecting the margin to stabilize in the last quarter of 2023 and then increase by two basis points in each quarter of 2024. Compared to my last report on the company, I’ve reduced my margin estimate for this year because I was previously expecting the margin to stabilize in the second quarter, which didn’t happen. The margin has already fallen to a level lower than my previous expectation.

Management’s Initiatives to Counter a Slowdown in Residential Loan Segment

WesBanco’s loan growth remained impressive in the third quarter of 2023. The company reported loan growth of 1.6% for the quarter, which brought the first nine-month growth to 5.7% (7.6% annualized). This growth was higher than my previous expectation given in my last report on the company.

Management appeared optimistic about future loan growth on the conference call due to its loan production office and lender hiring initiatives. The newest loan production office in Chattanooga is performing particularly well; therefore, it gives hope that loan growth can remain strong in upcoming quarters. Moreover, management mentioned on the conference call that the commercial loan pipeline as of October 16 was approximately $860 million, a 4% increase from the level of September 30.

However, the residential real estate segment, which made up 27.5% of total loans at the end of September 2023, is likely to hold back the total loan portfolio’s growth. This is because WesBanco has reduced the overall staffing of its residential lending operations, as mentioned in the conference call. The outlook for the residential mortgage segment does not appear positive because of high borrowing costs. The Mortgage Bankers Association expects total originations for 1-4-family mortgages to fall by 19% year-over-year in 2024.

Overall, I’m expecting loan growth to continue at roughly the same level as that witnessed in the third quarter of 2023. I’m expecting loan growth of 1.5% every quarter till the end of 2023. Compared to my last report on the company, I’ve raised my loan growth estimate because the third quarter’s performance beat my expectations. Moreover, the outlook seems rosier than before because of the pipelines and management’s initiatives.

The following table shows my balance sheet estimates.

In my last report on the company, I estimated earnings of $2.89 per share for 2023. I’ve reduced my earnings estimate because the margin decline surprised me over the last two quarters. Further, the provision expense was higher than my expectation in the third quarter of this year.

WSBC has a Comfortable Risk Position

WesBanco’s riskiness appears manageable due to the following factors.

• Gross unrealized losses on the Available-for-Sale securities portfolio amounted to $393 million at the end of September, as mentioned in the 10-Q filing . These unrealized losses are around 17% of the total equity balance, which isn’t too high. I’m expecting most of these losses to reverse when interest rates start declining next year.
• Uninsured deposits were 24% of total deposits at the end of September. This value isn’t large enough to be a source of concern.
• Geographical risk is also low because WesBanco operates in several states, namely West Virginia, Ohio, Pennsylvania, Indiana, Kentucky, and Maryland.

Maintaining a Buy Rating

WesBanco is offering a dividend yield of 5.2% at the current quarterly dividend rate of $0.36 per share. The earnings and dividend estimates suggest a payout ratio of 56% for 2024, which is above the five-year average of 48%, but still easily sustainable. Therefore, the dividend payout appears secure.

I’m using the historical price-to-tangible book (“P/TB”) and price-to-earnings (“P/E”) multiples to value WesBanco. The stock has traded at an average P/TB ratio of 1.52 in the past, as shown below.

The stock has traded at an average P/E ratio of around 12.3x in the past, as shown below.

Equally weighting the target prices from the two valuation methods gives a combined target price of $30.50 , which implies an 11.0% upside from the current market price. Adding the forward dividend yield gives a total expected return of 16.1%.

In my last report, I adopted a buy rating on WesBanco with a December 2023 target price of $28.80. I’ve now rolled over my target price to $30.50 for the end of next year. Considering the new target price, the stock is still offering a sizable price upside despite the stock price rally since the release of my last report. Further, the company is offering quite a high dividend yield. Based on the updated total expected return, I’m maintaining a buy rating on WesBanco, Inc.

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