Summary
- Balance sheet repositioning will likely slow down margin expansion.
- Strong job markets will likely keep loan growth from falling too low. Further, the state of credit lines shows that there's a good opportunity for growth.
- The December 2023 target price suggests a high upside from the current market price. Further, WTFC stock is offering a decent dividend yield.
Earnings of Wintrust Financial Corporation ( WTFC ) will continue to surge this year on the back of margin and loan growth. Further, the acquisition of asset management businesses will lift revenues. However, mortgage banking income will likely dip this year due to the effect of high-interest rates on refinancing and purchasing activity. Overall, I'm expecting Wintrust Financial to report earnings of $9.80 per share for 2023, up by 22% year-over-year. Compared to my last report on the company, I haven't changed my earnings estimate much. The year-end target price suggests a high upside from the current market price. Therefore, I'm maintaining a buy rating on Wintrust Financial Corporation.
Upcoming Changes in Balance Sheet Positioning to Restrain the Margin's Growth
Wintrust Financial's net interest margin continued to grow strongly during the last quarter of 2022. The margin expanded by 37 basis points during the quarter, following a growth of 42 basis points in the third quarter and 32 basis points in the second quarter of last year. The management expects the rate of expansion to remain strong in the first quarter of 2023. As mentioned in the earnings presentation , the management expects the margin to rise to 4.0% in the first quarter of 2023 from 3.71% in the fourth quarter of 2022.
Beyond the first quarter, however, the margin growth will likely slow down. This is because, firstly, the up-rate cycle is nearing its end as indicated by the Federal Reserve's projections . Secondly, the balance sheet repositioning will likely continue this year, thereby reducing the topline's rate sensitivity. The results of the management's last rate-sensitivity analysis showed that a 200-basis points hike in interest rates could boost the net interest income by 7.2% over twelve months, as mentioned in the 10-K filing .
2022 10-K Filing
The above rate sensitivity is true for the balance sheet position as of December 31, 2022. The management is planning to reposition its balance sheet in 2023 in order to "mitigate interest rate risk amid uncertainty", as mentioned in the earnings presentation. Further, rising interest rates will incentivize depositors to chase yields and move their funds from non-interest-bearing and low-rate accounts to higher-rate accounts. As a result, the margin's rate sensitivity is likely to significantly diminish in 2023.
Considering these factors, I'm expecting the net interest margin to grow by 20 basis points in 2023.
Internal and External Factors to Sustain Loan Growth
Wintrust Financial's loan growth remained robust during the last quarter of 2022. The portfolio grew by 2.6%, which took the full-year growth to 12.7%. The management is expecting loan growth to slow down to the mid-to-high-single-digit range in 2023, as mentioned in the conference call . As interest rates will be higher this year compared to last year, a slowdown in loan growth is only natural.
However, certain factors will support loan growth and keep it from falling too low. Firstly, the unemployment rate is persistently low in the country. As Wintrust Financial's loan portfolio is geographically well-diversified, the national average is a good proxy for the company's various markets.
Moreover, the unused line of credit balance has surged from $6,469 million at the end of 2021 to $7,338 million at the end of 2022, as mentioned in the presentation, which shows there is plenty of room for growth. To put this number in perspective, $7,338 million is 19% of the loans outstanding at the end of December 2022. If line utilization improves by five percentage points from the existing level of 40.5%, then the loan portfolio could grow by 2%, according to my calculations.
Considering the factors mentioned above, I'm expecting the loan portfolio to grow by 6% in 2023. Further, I'm expecting deposits to grow in line with loans. The following table shows my balance sheet estimates.
Financial Position | FY18 | FY19 | FY20 | FY21 | FY22 | FY23E |
Net Loans | 23,668 | 26,643 | 31,760 | 34,541 | 38,926 | 41,315 |
Growth of Net Loans | 10.1% | 12.6% | 19.2% | 8.8% | 12.7% | 6.1% |
Other Earning Assets | 4,685 | 6,935 | 9,801 | 12,252 | 9,284 | 9,661 |
Deposits | 26,095 | 30,107 | 37,093 | 42,096 | 42,903 | 45,535 |
Borrowings and Sub-Debt | 1,213 | 1,783 | 2,638 | 2,426 | 3,603 | 3,676 |
Common equity | 3,143 | 3,566 | 3,703 | 4,086 | 4,384 | 4,892 |
Book Value Per Share ($) | 55 | 62 | 64 | 71 | 73 | 79 |
Tangible BVPS ($) | 44 | 50 | 52 | 59 | 62 | 68 |
Source: SEC Filings, Author's Estimates (In USD million unless otherwise specified) |
Lower Non-Interest Income to Restrict Earnings Growth
The anticipated loan growth and margin expansion will lift earnings this year. On the other hand, non-interest income will be lower this year due to a fall in both mortgage refinancing and purchase activity as interest rates have risen. However, the non-interest income will receive some relief from the pending acquisition of two asset management businesses from Rothschild & Co. The transaction is scheduled to close during the first quarter of 2023, as mentioned in a press release . Through the acquisition, Wintrust will gain around $8 billion in assets under management, which will increase WTFC's assets under management by 23%.
Meanwhile, I'm expecting provisioning for expected loan losses to be near a normal level. I'm expecting the provision expense to make up around 0.21% of total loans in 2023, which is the same as the average for the last five years. Overall, I'm expecting Wintrust Financial to report earnings of $9.80 per share for 2023, up 22% year-over-year. The following table shows my income statement estimates.
Income Statement | FY18 | FY19 | FY20 | FY21 | FY22 | FY23E |
Net interest income | 965 | 1,055 | 1,040 | 1,125 | 1,495 | 1,928 |
Provision for loan losses | 35 | 54 | 214 | (59) | 79 | 88 |
Non-interest income | 356 | 407 | 604 | 586 | 461 | 380 |
Non-interest expense | 826 | 928 | 1,040 | 1,133 | 1,177 | 1,351 |
Net income - Common Sh. | 335 | 347 | 272 | 438 | 482 | 606 |
EPS - Diluted ($) | 5.86 | 6.03 | 4.68 | 7.58 | 8.02 | 9.80 |
Source: SEC Filings, Author's Estimates (In USD million unless otherwise specified) |
In my last report on Wintrust Financial, I estimated earnings of $9.78 per share for 2023. My updated earnings estimate is barely changed from my previous estimate as the tweaks I've made in all line items cancel each other out.
My estimates are based on certain macroeconomic assumptions that may not come to fruition. Therefore, actual earnings can differ materially from my estimates.
High Total Expected Return Calls for a Buy Rating
Wintrust Financial is offering a dividend yield of 1.8% at the current quarterly dividend rate of $0.40 per share. The earnings and dividend estimates suggest a payout ratio of 16% for 2023, which is in line with the five-year average of 17%.
I'm using the historical price-to-tangible book ("P/TB") and price-to-earnings ("P/E") multiples to value Wintrust Financial. The stock has traded at an average P/TB ratio of 1.41 in the past, as shown below.
FY18 | FY19 | FY20 | FY21 | FY22 | Average | |
T. Book Value per Share ($) | 44.0 | 48.5 | 52.1 | 58.9 | 61.7 | |
Average Market Price ($) | 85.8 | 69.3 | 47.9 | 78.2 | 89.2 | |
Historical P/TB | 1.95x | 1.43x | 0.92x | 1.33x | 1.44x | 1.41x |
Source: Company Financials, Yahoo Finance, Author's Estimates |
Multiplying the average P/TB multiple with the forecast tangible book value per share of $68.1 gives a target price of $96.4 for the end of 2023. This price target implies a 6.1% upside from the March 2 closing price. The following table shows the sensitivity of the target price to the P/TB ratio.
P/TB Multiple | 1.21x | 1.31x | 1.41x | 1.51x | 1.61x |
TBVPS - Dec 2023 ($) | 68.1 | 68.1 | 68.1 | 68.1 | 68.1 |
Target Price ($) | 82.7 | 89.5 | 96.4 | 103.2 | 110.0 |
Market Price ($) | 90.8 | 90.8 | 90.8 | 90.8 | 90.8 |
Upside/(Downside) | (8.9)% | (1.4)% | 6.1% | 13.7% | 21.2% |
Source: Author's Estimates |
The stock has traded at an average P/E ratio of around 11.6x in the past, as shown below.
FY18 | FY19 | FY20 | FY21 | FY22 | Average | |
Earnings per Share ($) | 5.86 | 6.03 | 4.68 | 7.58 | 8.02 | |
Average Market Price ($) | 85.8 | 69.3 | 47.9 | 78.2 | 89.2 | |
Historical P/E | 14.7x | 11.5x | 10.2x | 10.3x | 11.1x | 11.6x |
Source: Company Financials, Yahoo Finance, Author's Estimates |
Multiplying the average P/E multiple with the forecast earnings per share of $9.80 gives a target price of $113.3 for the end of 2023. This price target implies a 24.8% upside from the March 2 closing price. The following table shows the sensitivity of the target price to the P/E ratio.
P/E Multiple | 9.6x | 10.6x | 11.6x | 12.6x | 13.6x |
EPS 2023 ($) | 9.80 | 9.80 | 9.80 | 9.80 | 9.80 |
Target Price ($) | 93.7 | 103.5 | 113.3 | 123.1 | 132.9 |
Market Price ($) | 90.8 | 90.8 | 90.8 | 90.8 | 90.8 |
Upside/(Downside) | 3.3% | 14.1% | 24.8% | 35.6% | 46.4% |
Source: Author's Estimates |
Equally weighting the target prices from the two valuation methods gives a combined target price of $104.8 , which implies a 15.5% upside from the current market price. Adding the forward dividend yield gives a total expected return of 17.3%. Hence, I'm maintaining a buy rating on Wintrust Financial Corporation.
For further details see:
Wintrust Financial: Attractively Valued With Good Prospects Of Earnings Growth