- Better than expected credit performance suggests that provision expense will likely remain subdued in the coming quarters.
- Excluding the Paycheck Protection Program loans, the loan growth will likely remain strong because of a robust pipeline and the hiring of new loan originators.
- The December 2022 target price suggests a high upside from the current market price. Additionally, WSBC is offering a decent dividend yield.
WesBanco, Inc. (NASDAQ: NASDAQ:WSBC) has beaten my expectations so far this year because of a better than anticipated credit performance. The net charge-offs have remained almost negligible in the last five quarters. Based on the current credit trends, I have decided to revise my provision expense estimate for this year. I'm expecting loan growth to further support earnings in 2021. Overall, I am expecting the company to report earnings of $1.43 per share in the second half of 2021, taking the full year’s earnings to $3.50 per share. Next year’s target price suggests a decent upside from the current market price. As a result, I'm maintaining a bullish rating on WesBanco, Inc.
Credit Trends have Pleasantly Surprised so Far this Year
WesBanco’s credit performance has been better so far this year than I previously expected. The company posted net reversals of provisions of around $49 million in the first half of 2021. The actual loan losses have remained negligible in the last five quarters, as shown in the chart below taken from the second quarter’s investor presentation.
The provisioning will likely remain subdued in the coming quarters because the allowance level is quite high relative to the net charge-offs shown above. Allowances made up 1.36% of total loans at the end of the second quarter, as mentioned in the presentation.
However, I'm not expecting further big reversals because the credit risk is still somewhat high. As mentioned in the presentation, Criticized and Classified loans made up a substantial 4.41% of total loans at the end of the last quarter. This level is uncomfortably high when compared to the loan loss reserves, which made up 1.36% of total loans at the end of June 2021. Therefore, I'm expecting the gross provision expense to outweigh reversals in the coming quarters.
Considering these factors, I'm expecting the provision-expense-to-loan ratio to be nine basis points in the second half of 2021, on an annualized basis. For the full year, I’m expecting WesBanco to report a net provision reversal of $44 million. I have considerably revised upwards my estimate for net provision reversals from the previous estimate given in my last report. This is because WesBanco has performed better than expected in the first half of the year. Further, the net charge-offs trend shows that provisions should remain lower in the remainder of the year than previously expected. For 2022, I'm expecting provisions expense to be nine basis points of total loans, as opposed to a five-year average of 13 basis points (from 2016 to 2019).
Loan Growth, ex-PPP, Likely to Remain Robust
WesBanco’s loan portfolio declined in the second quarter partly because of the Paycheck Protection Program (“PPP”) loan forgiveness. The remaining PPP forgiveness will likely continue to drag loan growth in the remainder of 2021. According to details given in the second quarter’s 10-Q filing, PPP loans outstanding totaled $543.6 million at the end of June 2021, representing 5.2% of total loans. I'm expecting most of these loans to get forgiven before the year-end.
Excluding the impact of PPP, the loan portfolio will likely grow strongly in the coming quarters. Firstly, the pipeline was quite robust at the end of the last quarter, which bodes well for loan growth in the third quarter of 2021. The management mentioned in the second quarter’s conference call that the pipeline was at the highest point in the last one year and it was up 18% over the end of the first quarter. Moreover, the management has hired some mortgage loan originators, especially in the Northern Virginia area, which will help boost loan growth.
The management also mentioned in the conference call that it is targeting loan growth in the mid-to-upper-single digit range for 2021. If we exclude PPP, this range appears attainable as WesBanco has easily achieved mid-single-digit organic loan growth in previous years. Considering these factors, I'm expecting loans to increase by 2% in the second half of 2021, including the impact of PPP. For 2022, I'm expecting the loan portfolio to increase by 6% year-over-year. The following table shows my balance sheet estimates.
Margin Compression to Counter Loan Growth
WesBanco has aggressively reduced its deposit rates throughout the past year. As a result, the company has barely any room remaining for a further decline in deposit rates. The total deposit cost was just 12 basis points in the second quarter, as mentioned in the presentation.
Unlike the liabilities side, there's still some downside left on the asset side. As mentioned in the presentation, fixed-rate commercial loans made up 36% of total commercial loans at the end of the last quarter. As a result, it's safe to assume that a significant part of the portfolio is yet to incorporate last year’s rate cuts.
Moreover, the asset mix has recently shifted towards lower-yielding assets. Total securities now make up a higher proportion of total earning assets, as shown in the chart below.
The recent shift in asset mix will affect the margin in the third quarter of 2021. Moreover, the margin will suffer because purchase accounting accretion will naturally decline. The management mentioned in the conference call that the purchase accounting accretion will decline by one to two basis points each quarter.
Considering these factors, I'm expecting the net interest margin to decline by four basis points in the second half of 2021 from 3.12% in the second quarter of 2021. For 2022, I'm expecting no change in the margin despite an anticipated increase in interest rates next year. I'm not expecting an improvement in the margin because WesBanco’s deposits reprice faster than assets, as has been visible in the last year and a half.
Based on the outlook for margin and loan growth, I'm expecting the net interest income in the second half of 2021 to be 2% lower than the first half of the year. For 2022, I'm expecting the net interest income to increase by 2.5% year-over-year.
Expecting Full-Year Earnings of $3.50 per Share
The net reversals of provisions this year and loan growth will likely support earnings this year. Overall, I'm expecting WesBanco to report earnings of $1.43 per share in the second half of 2021, taking full-year earnings to $3.50 per share. I have considerably increased my earnings estimate from the estimate given in my last report mostly because of a revision in the provisions estimate. In my last report, I had anticipated earnings of $3.08 per share for 2021.
For 2022, I'm expecting WesBanco to report earnings of $2.58 per share, down 26% year-over-year. The anticipated earnings decline is mostly attributable to a higher provision expense next year. The following table shows my income statement estimates.
Actual earnings may differ materially from estimates because of the risks and uncertainties related to the COVID-19 pandemic, especially the Delta variant.
High Total Expected Return Calls for a Bullish Rating
WesBanco is offering a dividend yield of 3.7%, assuming the company maintains its quarterly dividend at the current level of $0.33 per share. The earnings and dividend estimates suggest a payout ratio of 51% for 2022, which is higher than the average of 44% from 2016 to 2019, but still manageable. Therefore, I believe there’s barely any threat to the dividend level through the end of 2022.
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 1.72 in the past, as shown below.
Multiplying the average P/TB multiple with the forecast tangible book value per share of $24.1 gives a target price of $41.4 for the end of 2022. This price target implies a 16.7% upside from the October 5 closing price. The following table shows the sensitivity of the target price to the P/TB ratio.
The stock has traded at an average P/E ratio of around 15.3x in the past, as shown below.
Multiplying the average P/E multiple with the forecast earnings per share of $2.58 gives a target price of $39.3 for the end of 2022. This price target implies a 10.9% upside from the October 5 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 $40.4, which implies a 13.8% upside from the current market price. My new target price is almost unchanged from the target price given in my last report. Adding the forward dividend yield to the implied price upside gives a total expected return of 17.6%. Hence, I’m maintaining a bullish rating on WesBanco, Inc.
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