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Wintrust Financial Corporation's (NASDAQ: NASDAQ:WTFC) earnings will benefit from continued strong loan growth next year. Further, the company's asset-sensitive balance sheet and an anticipated interest rate hike will expand the margin and support the bottom line. On the other hand, the anticipated loan growth will likely lead to a normalization of the provision expense, which will decrease earnings on a year-over-year basis. Overall, I'm expecting Wintrust Financial to report earnings of $6.2 per share in 2022, down 17% year-over-year. The December 2022 target price is quite close to the current market price. Therefore, I'm adopting a neutral rating on Wintrust Financial.
Robust Pipeline Lends to a Rosy Loan Growth Outlook
Wintrust Financial has been quite successful in increasing its loan portfolio in recent quarters. The company's total loans, excluding Paycheck Protection Program (“PPP”) loans, increased by $1.2 billion or 15% (annualized) in the third quarter of 2021, as mentioned in the earnings presentation. This remarkable growth will likely continue in the coming months as the loan pipeline is quite robust. The management mentioned in the third quarter’s conference call that the pipeline is at a 13-month high.
Wintrust Financial is a nationwide lender with around 40% of loans based in Illinois. As the company is more national than regional, the overall health of the country's economy is pivotal in determining the demand for WTFC’s credit products. I'm expecting economic activity in the country to return to a pre-pandemic level by next year; therefore, I'm expecting the demand for credit to remain healthy next year. However, the new COVID-19 variant, Omicron, poses some risks.
Further, the upcoming forgiveness of PPP loans will likely restrict loan growth. According to details given in the 10-Q filing, PPP loans made up around 3.3% of total loans at the end of September 2021. The balance of PPP loans is not too high, but it is still material.
Wintrust Financial Corporation’s loan growth has tended towards high-single-digits and low-double-digits in the past. Considering the factors mentioned above and the historical central tendency of the growth rate, I'm expecting the loan portfolio to increase by 1% in the last quarter of 2021 and 9% in 2022. Meanwhile, I'm expecting deposit growth to match loan growth next year. The following table shows my balance sheet estimates.
Asset Sensitive Position Puts Margin Expansion on the Cards
Wintrust Financial Corporation's net interest margin has been rangebound so far this year. I'm optimistic about the margin next year because of the anticipated interest-rate hike. Wintrust’s balance sheet has an asset-sensitive position, which means that an interest-rate hike will have a positive impact on the net interest income. According to the management's interest-rate sensitivity analysis given in the 10-Q filing, a 100-basis points gradual increase in interest rates can raise the net interest income by 5.4% over twelve months, as shown below.
Like other banks, there has been a buildup in excess liquidity on Wintrust’s books this year. Interest-Bearing Deposits with Banks surged to $5.2 billion by the end of September 2021 from $3.8 billion at the end of September 2020. Interest-Bearing Deposits with Banks made up a whopping 11% of total assets in September 2021, as shown below.
If WTFC could shift a portion of the interest-bearing deposits to higher-yielding securities, then the average earning asset yield could substantially improve. The company earned a yield of only 0.16% on interest-bearing deposits with banks and cash equivalents in the third quarter of 2021, as compared to a yield of 2.01% on investment securities, according to details given in the 10-Q filing. If the company deploys $1 billion of its excess interest-bearing deposits with banks into assets at rates just 50 basis points higher, then the average earning asset yield for WTFC could improve by a basis point, according to my calculations. The hike in Treasury yields experienced this quarter provides Wintrust Financial with a good opportunity to better employ its excess cash. In fact, the two and three-year Treasury yields reached the year’s highest levels in November. The chart below shows the current yield curve in blue compared with older yield curves.
Considering the factors mentioned above, I'm expecting the margin to remain almost unchanged in the last quarter of 2021 from 2.58% in the third quarter. For 2022, I'm expecting the margin to increase by four basis points.
Healthy Loan Growth to Drive Provision Expense
Wintrust Financial has positively surprised me so far this year by posting a large net reversal of provisions. Following these reversals, the provisions for loan losses appear at a comfortable level. Allowances made up 0.89% of total loans at the end of the last quarter, while non-performing loans made up 0.27% of total loans at the end of the last quarter, as mentioned in the earnings presentation. I believe the excess of the allowance over the non-performing loans easily accounts for the risks related to the Omicron variant. As the current allowances easily cover the credit risk, I'm expecting the existing portfolio’s risk to have little effect on the upcoming provision expense.
Instead, the strong loan growth discussed above will likely be the major driver of provisioning in the coming quarters. As a result, I'm expecting the provisioning to return to a normal level next year. The provision expense made up 0.17% of total loans on average from 2016 to 2019. Therefore, I'm expecting the provision expense to make up around 0.16% of total loans in 2022. For the last quarter of 2021, I'm expecting the provision expense to be 0.18% of total loans on an annualized basis.
Expecting Earnings to Decline by 17% Next Year
The normalization of the provision expense will likely drag earnings next year. Moreover, the non-interest income will likely decline because the mortgage refinancing activity will trend towards a normal level after heightened activity in 2020 and 2021. Higher interest rates will discourage refinancing of mortgages, which will lead to a normalization of the non-interest income. On the other hand, strong loan growth and margin expansion will limit the bottom-line decline.
Overall, I'm expecting Wintrust Financial to report earnings of $1.45 per share in the last quarter of 2021, taking full-year earnings to $7.45 per share. In my previous report on Wintrust Financial, I had estimated that the company would earn $6.43 per share. I have significantly revised up my earnings estimate for 2021 because of the positive surprises related to provision reversals and the net interest income in the first nine months of the year.
For 2022, I'm expecting Wintrust Financial to report earnings of around $6.20 per share, down 17% year-over-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 Omicron variant. The timeline of an interest rate hike is also uncertain.
Current Market Price Close to Next Year’s Target Price
Wintrust Financial is offering a dividend yield of only 1.38% at the current quarterly dividend rate of $0.31 per share. The earnings and dividend estimates suggest a payout ratio of 20% for 2022, which is a bit higher than the five-year average of 16%. Therefore, I’m not expecting an increase in the dividend level. Moreover, the capital is uncomfortably close to the minimum regulatory requirements. Wintrust reported a Tier I Capital ratio of 9.9% at the end of September 2021, as compared to the minimum regulatory requirement of 8.5%, according to details given in the presentation.
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 1.52 in the past, as shown below.
Multiplying the average P/TB multiple with the forecast tangible book value per share of $63.6 gives a target price of $96.5 for the end of 2022. This price target implies a 7.4% upside from the December 2 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 13.5x in the past, as shown below.
Multiplying the average P/E multiple with the forecast earnings per share of $6.20 gives a target price of $83.9 for the end of 2022. This price target implies a 6.6% downside from the December 2 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 $90.2, which implies a 0.4% upside from the current market price. Adding the forward dividend yield gives a total expected return of 1.8%. Hence, I’m adopting a neutral rating on Wintrust Financial Corporation. I wouldn’t consider investing in the stock unless its price dipped by more than 10% from the current level.
