WSBC - WesBanco: Positive Topline Growth Prospects Appear Priced In

Summary

• Economic factors will likely sustain loan growth.
• Margin will likely continue to increase despite lower deposit pricing power.
• Provision normalization and higher salary expenses are likely to drag earnings this year.
• The December 2022 target price suggests a small downside from the current market price. However, WSBC is offering a good dividend yield.

Earnings of WesBanco, Inc. ( WSBC ) will likely dip this year before recovering next year. Growth in both commercial real estate and residential loan segments will likely sustain earnings through the end of 2023. Further, the rising rate environment will lift the margin. On the other hand, higher provision and salary expenses will likely drag earnings. Overall, I'm expecting WesBanco to report earnings of $2.80 per share for 2022, down 21% year-over-year. Compared to my last report on the company, I've tweaked upwards my earnings estimate because I've revised both my loan growth and provision expense estimates. For 2023, I'm expecting earnings to grow by 8% to $3.02 per share. The year-end target price is quite close to the current market price. Therefore, I'm maintaining a hold rating on WesBanco, Inc.

Loan Growth to Depend on Economic Factors

The loan portfolio finally trended upwards during the second quarter of 2022 after declining every quarter from June 2020 to December 2021 and then remaining almost unchanged for the first quarter of 2022. The positive trend will likely continue in the quarters ahead.

More than half the loan book comprises commercial real estate loans. Further, WesBanco’s loan book is well diversified geographically. Therefore, the U.S. coincident index is an appropriate gauge for the company's product demand. As shown below, the index indicates that the economy is in satisfactory shape, which bodes well for loan growth.

Residential real estate and home equity loans also make up a sizable portion of the portfolio, at around a quarter of total loans. The Mortgage Bankers Association forecasts mortgage purchase volume to remain flattish this year compared to last year and then grow by 4% year-over-year in 2023, which bodes well for WesBanco’s loan growth outlook. Further, MBA expects refinancing volume to plunge this year, which means there is less chance that customers will leave WesBanco in favor of other financial institutions or vice versa.

Considering these factors, I'm expecting the loan portfolio to grow by 6% annualized in the second half of 2022 and 4% in 2023. This leads to full-year 2022 loan growth of 8.2%. In my last report on WesBanco, I estimated a much lower loan growth of 3.1%. I've increased my loan growth estimate for the full year only because of the second quarter’s performance. I haven't changed my estimate for the second half of this year. The following table shows my balance sheet estimates.

In my last report on WesBanco, I estimated earnings of $2.56 per share for 2022. I've increased my earnings estimate mostly because I've raised my loan growth estimate and reduced my provision expense estimate.

Actual earnings may differ materially from estimates because of the risks and uncertainties related to inflation, and consequently the timing and magnitude of interest rate hikes. Further, a stronger or longer-than-anticipated recession can increase the provisioning for expected loan losses beyond my estimates.

Current Market Price Close to the Year-End Target Price

WesBanco has a long-standing tradition of increasing its dividend every year. Given the earnings outlook for 2023, I'm expecting the company to increase its dividend again by $0.01 per share early next year. This will lead to a full-year dividend payout of $1.4 per share, which implies a 46% payout ratio. In comparison, the payout ratio averaged 44% from 2017 to 2019. My dividend estimate suggests a forward dividend yield of 4.0%.

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 1.57 in the past, as shown below.

The stock has traded at an average P/E ratio of around 13.2x in the past, as shown below.

Equally weighting the target prices from the two valuation methods gives a combined target price of $34.4 , which implies a 0.7% downside from the current market price. Adding the forward dividend yield gives a total expected return of 3.2%. I downgraded WesBanco to a hold rating in my last report. This time around, I've decided to maintain the rating at hold based on the total expected return.

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