WSBC - WesBanco: High Dividend Yield And Price Upside With Manageable Risks

2023-05-17 21:46:39 ET

Summary

• The margin will likely suffer from further deterioration of the funding mix.
• Deposits will likely restrain loan growth.
• The December 2023 target price suggests a high upside from the current market price.
• WSBC is offering a dividend yield of 6.5%. The dividend appears secure as the implied payout ratio seems sustainable.

Earnings of WesBanco, Inc. ( WSBC ) will most probably fall this year due to pressure on the net interest margin and higher operating expenses. I’m expecting the company to report earnings of $2.89 per share for 2023, down 4% year-over-year. Compared to my last report on the company, I’ve reduced my earnings estimate because I’ve slashed my net interest margin estimate. The year-end target price suggests a high upside from the current market price. Further, WesBanco is offering a dividend yield that’s over 6%. Considering the attractive valuation and the moderate risk level, I’m upgrading WSBC stock to a buy rating.

Loan Growth Likely to Outpace Deposit Growth

The deposit book declined by 2.0% in the first quarter of 2023, in continuation of the trend witnessed since the second quarter of 2022. The magnitude of the contraction in the first quarter was in line with the magnitude seen in the last three quarters of 2022. As the deposit book had been contracting since long before the banking crisis started in March 2023, WesBanco’s deposit trend appears to be attributable to the Fed’s monetary tightening actions rather than a deposit run on the bank.

So far, the deposit book trend has not affected the loan portfolio’s growth. Loans grew at a decent rate of 1.7% during the first quarter, following a surge of 4.2% in the fourth quarter of 2022. WesBanco has funded additional loans through borrowings and a reduction of securities in the last few quarters. However, this cannot continue for long as funding loans through costly borrowings instead of cheaper deposits is detrimental to the margin. For the remainder of the year, I’m expecting deposit constraints to limit loan growth.

On the plus side, the continued team growth will likely support loan growth. The management mentioned in the conference call that it planned to hire additional commercial bankers this year like in the last couple of years.

Considering these factors, I’m expecting the loan portfolio to grow by 4.8% and the deposit book to grow by 0.3% in 2023. The following table shows my balance sheet estimates.

Risk Appears Moderate

Unrealized mark-to-market losses on the Available-for-Sale securities portfolio amounted to $234 million at the end of March 2023, as mentioned in the presentation. To put this number in perspective, $234 million is 10% of the total equity balance at the end of the last quarter. WesBanco’s stock price has plunged by 37.5% since the start of the banking crisis on March 8, 2023, which is far higher than 10%. Therefore, I’m not worried about the unrealized losses as they already appear to be incorporated in the market price.

Further, uninsured and uncollateralized deposits totaled $3 billion, representing 24.7% of total deposits at the end of March 2023, as mentioned in the presentation. This level is also not worrisome because WesBanco has $4.5 billion in immediate liquidity, which can easily cover these deposits in the unlikely event of a deposit run on the bank.

Considering these two factors, I believe WesBanco’s risk level is only moderate in the current environment.

Upgrading to a Buy Rating

WesBanco is offering a high dividend yield of 6.5% at the current quarterly dividend rate of $0.35 per share. The earnings and dividend estimates suggest a payout ratio of 48% for 2023, which is the same as the average for the last five years. Therefore, the dividend appears secure despite the earnings outlook.

I’m using the peer average price-to-tangible book (“P/TB”) and price-to-earnings (“P/E”) multiples to value WesBanco. Peers are trading at an average P/TB ratio of 1.29 and an average P/E ratio of 10.45, as shown below.

Multiplying the average P/E multiple with the forecast earnings per share of $2.89 gives a target price of $30.2 for the end of 2023. This price target implies a 39.5% upside from the May 16 closing price. The following table shows the sensitivity of the target price to the P/E ratio.

Equally weighting the target prices from the two valuation methods gives a combined target price of $28.8 , which implies a 33.2% upside from the current market price. Adding the forward dividend yield gives a total expected return of 39.7%.

In my last report, I adopted a hold rating with a target price of $34.4. Since then, the stock price has plunged because of the overall panic in the banking sector following the recent bank failures. In my opinion, the market has overreacted because the risk level is only moderate. Based on the total expected return and the riskiness, I’m upgrading WesBanco, Inc. to a buy rating.

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