Earnings of WesBanco, Inc. (NASDAQ:WSBC) will most probably dip this year because of higher provisioning expenses for expected loan losses. Further, the average loan balance for 2022 will likely be lower than last year due to the sharp decline in the loan portfolio throughout 2021. On the other hand, significant margin expansion will support the bottom line. Overall, I’m expecting WesBanco to report earnings of $2.56 per share for 2022, down 28% year-over-year. Compared to my last report on the company, I have slightly revised downwards my earnings estimate mostly because I have increased my provision expense estimate for the year. The year-end target price suggests a small upside from the current market price. Therefore, I’m downgrading WesBanco to a hold rating.
Provisioning To Grow Due To Higher Rates
WesBanco’s existing loan loss reserves comfortably cover the current portfolio’s bad loans. Allowances made up 1.21% of total loans, while nonperforming loans made up just 0.38% of total loans at the end of March 2022, as mentioned in the earnings release. However, there are significant threats on the horizon that will require further strengthening of reserves in the coming quarters.
The biggest headwind is the faster-than-expected interest rate hike. Higher interest rates are likely to push some of the stressed borrowers into default. Currently, the upper limit of the federal funds rate stands at 1.75%, and the Fed projects it to reach around 3.5% later this year. The last time the federal funds rate was above 2.0%, i.e., the third quarter of 2019, WesBanco’s nonperforming loans made up 0.52% of total loans. This is much higher than the existing nonperforming loan ratio of 0.38%. Therefore, there is a chance that nonperforming loans will increase by more than 37% in the year ahead. (Note: 37% is calculated as the difference between 0.52% and 0.38%).
Further, WesBanco will want to build its reserves in case of a recession. Moreover, upcoming loan additions will require provisioning for expected loan losses. Overall, I’m expecting the provision expense, net of reversals, to be slightly above normal this year. I’m expecting the net provision expense to make up 0.15% of total loans in 2022. In comparison, the net provision expense averaged 0.12% of total loans from 2017 to 2019.
In my last report on WesBanco, I estimated a provision expense of $10 million for 2022. I have now revised it upwards to $15 million due to the change in interest rate outlook.
Management’s Efforts To Drive Loan Growth
After six quarters of continuous decline, the loan portfolio stabilized in the first quarter of 2022. Excluding Paycheck Protection Program (“PPP”) loan forgiveness, the loan portfolio grew by 0.9% during the first quarter, or 3.6% annualized, as mentioned in the earnings presentation. The improvement during the quarter was not only attributable to loan originations but also to a decline in commercial real estate payoffs, as mentioned in the latest conference call.
Loan growth will likely accelerate in the year ahead partly because WesBanco has been hiring and expanding its physical presence over the last year. The company also opened loan production offices in Nashville and Indianapolis during the first quarter of 2022, as mentioned in the presentation.
Moreover, the management mentioned in the conference call that its loan pipelines were much higher at the beginning of the second quarter compared to the December 2021 level. The loan pipeline stood at around $980 million at the time of the conference call. To put this number in perspective, $980 million was around 10% of gross loans at the end of March 2022.
On the other hand, high interest rates will act as a headwind for loan growth, especially mortgage loans. High interest rates are already taking a toll on not only refinancing but also new purchases. Mortgage Bankers Association’s latest report shows that mortgage applications for new purchases were down by around 10% in the week ending June 17, 2022, compared to a year-ago period.
Considering these factors, I am expecting the loan portfolio to increase by 3% by the end of 2022 from the end of 2021. Despite this loan growth through 2022, the average loan balance for this year will be lower than last year. This is because of the sharp decline in the loan balances throughout 2021.
Meanwhile, I’m expecting deposits to grow mostly in line with loans in the remainder of 2022. The following table shows my balance sheet estimates.
FY17 | FY18 | FY19 | FY20 | FY21 | FY22E | ||
Financial Position | |||||||
Net Loans | 6,296 | 7,607 | 10,216 | 10,603 | 9,612 | 9,906 | |
Growth of Net Loans | 1.5% | 20.8% | 34.3% | 3.8% | (9.4)% | 3.1% | |
Other Earning Assets | 2,325 | 3,200 | 3,353 | 3,612 | 5,151 | 5,507 | |
Deposits | 7,044 | 8,832 | 11,004 | 12,429 | 13,566 | 14,216 | |
Borrowings and Sub-Debt | 1,297 | 1,535 | 1,898 | 983 | 459 | 580 | |
Common equity | 1,395 | 1,979 | 2,594 | 2,612 | 2,549 | 2,456 | |
Book Value Per Share ($) | 31.7 | 40.4 | 46.1 | 38.8 | 40.3 | 39.9 | |
Tangible BVPS ($) | 18.3 | 21.6 | 25.7 | 21.5 | 22.1 | 21.2 | |
Source: SEC Filings, Author’s Estimates (In USD million unless otherwise specified) |
Moderately High Rate-Sensitivity To Lift The Top Line
The management mentioned in the conference call that it expects the margin to come under pressure from lower purchase accounting accretion as well as lower PPP fees. On the other hand, the rising interest-rate environment will raise earning-asset yields, which will, in turn, boost the net interest income.
The management mentioned in the conference call that it estimates a 200-basis points interest rate shock to increase the net interest income by 11% over twelve months. In reality, the interest rate hike is gradual; therefore, the impact of rate hikes on net interest income will be lower than 11%.
Overall, I’m expecting the net interest margin to increase by 18 basis points in the last nine months of 2022, from 2.95% in the first quarter of the year.
Expecting Earnings To Dip by 28% Year-Over-Year
The anticipated hike in provision expense will likely be the chief contributor to an earnings decline this year. Moreover, a lower average loan balance this year relative to last year will contribute to an earnings decline. On the other hand, significant margin expansion will likely support the bottom line. Overall, I’m expecting WesBanco to report earnings of $2.56 per share in 2022, down 28% year-over-year. The following table shows my income statement estimates.
FY17 | FY18 | FY19 | FY20 | FY21 | FY22E | ||
Income Statement | |||||||
Net interest income | 290 | 347 | 400 | 479 | 458 | 450 | |
Provision for loan losses | 10 | 8 | 11 | 108 | (64) | 15 | |
Non-interest income | 89 | 100 | 117 | 128 | 133 | 122 | |
Non-interest expense | 221 | 265 | 312 | 355 | 353 | 353 | |
Net income – Common Sh. | 94 | 143 | 159 | 119 | 232 | 158 | |
EPS – Diluted ($) | 2.14 | 2.92 | 2.83 | 1.77 | 3.53 | 2.56 | |
Source: SEC Filings, Earnings Releases, Author’s Estimates (In USD million unless otherwise specified) |
In my last report on WesBanco, I estimated earnings of $2.58 per share. I have now slightly reduced my earnings estimate because I have increased my provision expense estimate for the year.
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, the threat of a recession can increase the provisioning for expected loan losses beyond my expectation.
Downgrading To A Hold Rating
WesBanco is offering a dividend yield of 4.2% at the current quarterly dividend rate of $0.34 per share. The earnings and dividend estimates suggest a payout ratio of 53% for 2022, which is close to the five-year average of 48%. Therefore, the earnings outlook does not threaten the dividend level.
I’m using the historical price-to-tangible book (“P/TB”) and price-to-earnings (“P/E”) multiples to value WesBanco. The stock has traded at an average P/TB ratio of 1.57 in the past, as shown below.
FY18 | FY19 | FY20 | FY21 | Average | ||
T. Book Value per Share ($) | 21.6 | 25.7 | 21.5 | 22.1 | ||
Average Market Price ($) | 44.1 | 38.1 | 25.3 | 34.7 | ||
Historical P/TB | 2.04x | 1.48x | 1.17x | 1.57x | 1.57x | |
Source: Company Financials, Yahoo Finance, Author’s Estimates |
Multiplying the average P/TB multiple with the forecast tangible book value per share of $21.2 gives a target price of $33.2 for the end of 2022. This price target implies a 3.1% upside from the June 24 closing price. The following table shows the sensitivity of the target price to the P/TB ratio.
P/TB Multiple | 1.37x | 1.47x | 1.57x | 1.67x | 1.77x |
TBVPS – Dec 2022 ($) | 21.2 | 21.2 | 21.2 | 21.2 | 21.2 |
Target Price ($) | 29.0 | 31.1 | 33.2 | 35.3 | 37.5 |
Market Price ($) | 32.2 | 32.2 | 32.2 | 32.2 | 32.2 |
Upside/(Downside) | (10.0)% | (3.4)% | 3.1% | 9.7% | 16.3% |
Source: Author’s Estimates |
The stock has traded at an average P/E ratio of around 13.2x in the past, as shown below.
FY18 | FY19 | FY20 | FY21 | Average | ||
Earnings per Share ($) | 2.92 | 2.83 | 1.77 | 3.53 | ||
Average Market Price ($) | 44.1 | 38.1 | 25.3 | 34.7 | ||
Historical P/E | 15.1x | 13.5x | 14.3x | 9.8x | 13.2x | |
Source: Company Financials, Yahoo Finance, Author’s Estimates |
Multiplying the average P/E multiple with the forecast earnings per share of $2.56 gives a target price of $33.7 for the end of 2022. This price target implies a 4.6% upside from the June 24 closing price. The following table shows the sensitivity of the target price to the P/E ratio.
P/E Multiple | 11.2x | 12.2x | 13.2x | 14.2x | 15.2x |
EPS – Dec 2022 ($) | 2.56 | 2.56 | 2.56 | 2.56 | 2.56 |
Target Price ($) | 28.6 | 31.1 | 33.7 | 36.3 | 38.8 |
Market Price ($) | 32.2 | 32.2 | 32.2 | 32.2 | 32.2 |
Upside/(Downside) | (11.3)% | (3.3)% | 4.6% | 12.6% | 20.5% |
Source: Author’s Estimates |
Equally weighting the target prices from the two valuation methods gives a combined target price of $33.5, which implies a 3.9% upside from the current market price. Adding the forward dividend yield gives a total expected return of 8.1%.
In my last report on WesBanco, I adopted a buy rating with a December 2022 target price of $37.30. I have now reduced my target price, which leaves only a small upside from the current market price. Based on the total expected return, I’m downgrading WesBanco, Inc. to a hold rating.
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