2023-11-22 18:17:57 ET
Summary
- The margin will likely stop declining soon mainly due to the apparent end of the up-rate cycle.
- Loan growth is likely to be slightly better than the third quarter’s level, but still below the historical average.
- The December 2024 target price suggests a high upside from the current market price. Further, WTFC is offering a modest dividend yield.
Earnings of Wintrust Financial Corporation (NASDAQ: WTFC ) will likely remain stable through the end of 2024. I believe below-average loan growth and slight margin expansion will lift earnings, while a proportionate increase in expenses will restrict the earnings growth. Overall, I’m expecting the company to report earnings of $10.22 per share for 2023 and $10.15 per share for 2024. Next year’s target price suggests a high upside from the current market price. Hence, I’m maintaining a buy rating on Wintrust Financial.
Margin Stability Ahead
The net interest margin continued to decline in the third quarter of the year, however, the pace of decline slowed down. The margin dipped by only four basis points in the last quarter, down from 17 basis points in the second quarter of the year. Part of the margin contraction during the last two quarters was attributable to deposit migration. This led to higher deposit costs. The deposit mix’s shift away from non-interest-bearing accounts and towards interest-bearing accounts continued into the third quarter of 2023, as shown below.
SEC Filings
The impact of the deposit mix deterioration was blunted by quick loan re-pricing. Nearly 80% of Wintrust Financial’s loans mature or reprice within a year, as mentioned in the conference call .
I’m expecting the declining trend to bottom out soon and the margin to remain somewhat stable through the end of next year. This is because I’m not expecting further deposit mix deterioration. Previously, interest rate hikes were incentivizing deposit migration. Now that the up-rate cycle has ended, the creation of new incentives will also end. Further, the loan re-pricing will end quickly as a majority of loans are quick to re-price.
Overall, I’m expecting the margin to remain unchanged in the last quarter of 2023 from the third quarter of the year. For 2024, I’m expecting the margin to grow by just 10 basis points.
Loan Growth Likely to Remain Decent
Although the loan growth so far this year has been below the historical average, it is still in a decent high-single-digit range. The management appeared optimistic about loan growth in the conference call, especially for commercial real estate (“CRE”) and commercial and industrial loans (“C&I”).
I too believe that loan growth can remain at a satisfactory level in upcoming quarters due to macroeconomic factors. Wintrust Financial's loan portfolio is geographically well-diversified; therefore, the national average is a good proxy for the company's various markets. The country’s labor markets are currently quite healthy, which bodes well for credit demand. Further, the job markets are likely to remain robust. As shown below, the survey of economists shows that the unemployment rate is expected to rise only slightly over the next year. Even after the uptrend, the unemployment rate for 2024 will most probably be better than the rates before 2018.
As Wintrust Financial’s management is focused on commercial loans in the near term, the purchasing managers’ index is another good gauge of credit demand. As shown below, the services PMI index is in the expansionary territory (above 50), which bodes well for loan growth. However, the manufacturing PMI index has been in contractionary territory throughout this year, which gives pause to my optimism.
Overall, I’m expecting the loan portfolio to grow by 1.5% each quarter till the end of 2024. My projected growth rate is better than the third quarter’s growth rate of 1.0%. The following table shows my balance sheet estimates.
Financial Position | FY19 | FY20 | FY21 | FY22 | FY23E | FY24E |
Net Loans | 26,643 | 31,760 | 34,541 | 38,926 | 41,748 | 44,310 |
Growth of Net Loans | 12.6% | 19.2% | 8.8% | 12.7% | 7.2% | 6.1% |
Other Earning Assets | 6,935 | 9,801 | 12,252 | 9,284 | 10,207 | 10,621 |
Deposits | 30,107 | 37,093 | 42,096 | 42,903 | 45,668 | 48,470 |
Borrowings and Sub-Debt | 1,783 | 2,638 | 2,426 | 3,603 | 3,680 | 3,754 |
Common equity | 3,566 | 3,703 | 4,086 | 4,384 | 4,435 | 4,967 |
Book Value Per Share ($) | 62 | 64 | 71 | 73 | 71 | 80 |
Tangible BVPS ($) | 50 | 52 | 59 | 62 | 60 | 69 |
Source: SEC Filings, Author's Estimates(In USD million unless otherwise specified) |
Expecting Earnings to be Stable
I’m expecting earnings for the fourth quarter of 2023 to be almost the same as the earnings for the third quarter of the year. While loan growth will lift earnings, a proportionate increase in provision expense for expected loan losses and operating expenses will restrict the earnings growth. The operating expenses will receive some respite from the non-recurrence of some expenses. The management mentioned in the conference call that about $6 million of uncommon expenses were recorded in the third quarter which it doesn’t expect to recur in the fourth quarter.
For 2024 as well, I’m expecting earnings to continue at a similar level. While loan growth and slight margin expansion will lift earnings, a proportionate rise in provision and operating expenses will curtail the earnings growth.
Overall, I’m expecting Wintrust Financial to report earnings of $10.22 per share for 2023 and $10.15 per share for 2024. The following table shows my income statement estimates.
Income Statement | FY19 | FY20 | FY21 | FY22 | FY23E | FY24E |
Net interest income | 1,055 | 1,040 | 1,125 | 1,495 | 1,838 | 1,969 |
Provision for loan losses | 54 | 214 | (59) | 79 | 93 | 88 |
Non-interest income | 407 | 604 | 586 | 461 | 446 | 458 |
Non-interest expense | 928 | 1,040 | 1,133 | 1,177 | 1,287 | 1,436 |
Net income - Common Sh. | 347 | 272 | 438 | 482 | 635 | 631 |
EPS - Diluted ($) | 6.03 | 4.68 | 7.58 | 8.02 | 10.22 | 10.15 |
Source: SEC Filings, Author's Estimates(In USD million unless otherwise specified) |
In my last report , which was issued before the first quarter’s results, I projected earnings of $9.80 per share for 2023. I’ve now increased my forecast to $10.22 because non-interest income has exceeded my previous expectations so far this year.
Risks are Not a Cause for Concern
Due to the following factors, I believe the risk of investing in Wintrust Financial is limited.
- Uninsured deposits are not a concern as liquidity sources, including cash and collateralized funding sources, were 124% of uninsured and uncollateralized deposits as of September 30, 2023, as mentioned in the 10-Q filing . Further, the management has increased its use of the MaxSafe® product that provides $3.75 million of FDIC insurance per account holder. MaxSafe® deposit balances increased $547 million from the end of June till the end of September 2023 across all product categories, as mentioned in the earnings presentation .
- The Company's capital levels were well in excess of regulatory thresholds at the end of September, and the management expects that the company would remain well capitalized in the event it was to liquidate its entire investment portfolio.
- Wintrust Financial is geographically very well diversified. Wintrust is present throughout the United States and even some parts of Canada. Therefore, there is no risk of concentration.
Maintaining a Buy Rating
Wintrust Financial is offering a dividend yield of 1.9% at the current quarterly dividend rate of $0.40 per share. The earnings and dividend estimates suggest a payout ratio of just 15.8% for 2024, which is close to the five-year average of 17%. Therefore, I’m assuming no change in the dividend level.
I’m using the historical price-to-tangible book (“P/TB”) and price-to-earnings (“P/E”) multiples to value Wintrust Financial. The stock has traded at an average P/TB ratio of 1.28 in the past, as shown below.
FY19 | FY20 | FY21 | FY22 | Average | |
T. Book Value per Share ($) | 48.5 | 52.1 | 58.9 | 61.7 | |
Average Market Price ($) | 69.3 | 47.9 | 78.2 | 89.2 | |
Historical P/TB | 1.43x | 0.92x | 1.33x | 1.44x | 1.28x |
Source: Company Financials, Yahoo Finance, Author's Estimates |
Multiplying the average P/TB multiple with the forecast tangible book value per share of $68.9 gives a target price of $88.3 for the end of 2024. This price target implies a 5.1% upside from the November 21 closing price. The following table shows the sensitivity of the target price to the P/TB ratio.
P/TB Multiple | 1.08x | 1.18x | 1.28x | 1.38x | 1.48x |
TBVPS - Dec 2024 ($) | 68.9 | 68.9 | 68.9 | 68.9 | 68.9 |
Target Price ($) | 74.5 | 81.4 | 88.3 | 95.2 | 102.1 |
Market Price ($) | 84.0 | 84.0 | 84.0 | 84.0 | 84.0 |
Upside/(Downside) | (11.3)% | (3.1)% | 5.1% | 13.3% | 21.6% |
Source: Author's Estimates |
The stock has traded at an average P/E ratio of around 10.8x in the past, as shown below.
FY19 | FY20 | FY21 | FY22 | Average | |
Earnings per Share ($) | 6.03 | 4.68 | 7.58 | 8.02 | |
Average Market Price ($) | 69.3 | 47.9 | 78.2 | 89.2 | |
Historical P/E | 11.5x | 10.2x | 10.3x | 11.1x | 10.8x |
Source: Company Financials, Yahoo Finance, Author's Estimates |
Multiplying the average P/E multiple with the forecast earnings per share of $10.15 gives a target price of $109.5 for the end of 2024. This price target implies a 30.4% upside from the November 21 closing price. The following table shows the sensitivity of the target price to the P/E ratio.
P/E Multiple | 8.8x | 9.8x | 10.8x | 11.8x | 12.8x |
EPS 2024 ($) | 10.15 | 10.15 | 10.15 | 10.15 | 10.15 |
Target Price ($) | 89.2 | 99.3 | 109.5 | 119.6 | 129.8 |
Market Price ($) | 84.0 | 84.0 | 84.0 | 84.0 | 84.0 |
Upside/(Downside) | 6.2% | 18.3% | 30.4% | 42.5% | 54.6% |
Source: Author's Estimates |
Equally weighting the target prices from the two valuation methods gives a combined target price of $98.9, which implies a 17.8% upside from the current market price. Adding the forward dividend yield gives a total expected return of 19.7%. Hence, I’m maintaining a buy rating on Wintrust Financial.
For further details see:
Wintrust Financial: Earnings Likely To Remain Flattish