Wintrust Financial: Loan Additions To Play Key Role In Earnings Growth

Sep. 08, 2022 5:39 AM ETWintrust Financial Corporation (WTFC)1 Comment
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Sheen Bay Research
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Summary

  • Signs of economic expansion will likely sustain loan growth at a decent level through the end of 2023.
  • An overwhelming 77% of total loans will re-price within a year. Therefore, the margin will benefit from higher interest rates this year.
  • The high inflation environment will likely keep provisioning for expected loan losses above normal for the remainder of this year.
  • The December 2022 target price suggests a high upside from the current market price. However, WTFC is offering a low dividend yield.
Wintrust Grand Banking hall in Chicago, Illinois, USA.

JHVEPhoto/iStock Editorial via Getty Images

Earnings of Wintrust Financial Corporation (NASDAQ:WTFC) will likely remain flattish this year before increasing next year. Loan growth will likely play a pivotal role in boosting earnings through the end of 2023. Further, the moderately rate-sensitive margin will benefit from the rising-rate environment. On the other hand, the provisioning expense will likely remain above normal during the second half of 2022, which will drag earnings. Overall, I'm expecting Wintrust Financial to report earnings of $7.41 per share for 2022, down by just 2% year-over-year. Compared to my last report on the company, I've increased my earnings estimate mostly because I've revised upward the loan growth estimate following the second quarter's phenomenal performance. For 2023, I'm expecting the company to report earnings of $8.78 per share, up 18% year-over-year. The year-end target price suggests a high upside from the current market price. Therefore, I'm maintaining a buy rating on Wintrust Financial.

Loan Growth to Decelerate

Wintrust Financial's loan book grew by a remarkable 5.1% in the second quarter of 2022, or 20% annualized, which beat my expectations. Growth will most probably slow down in the remainder of the year as the second quarter’s growth rate is unusual for the company given its history. Further, higher interest rates will dampen credit demand. The upper limit of the Fed funds rate is now at 2.5%, as opposed to the average of 0.96% during the second quarter of 2022. Moreover, the management also mentioned in the latest conference call that it expects lower, mid-to-high-single-digit loan growth for the remainder of the year.

However, certain economic factors other than interest rates can sustain loan growth. Wintrust Financial’s loan portfolio is well-diversified geographically, but by loan segments, it's concentrated in commercial and commercial real estate loans. Therefore, the purchasing managers' index is a good gauge of credit demand. As shown below, both the services and manufacturing indices are above 50, which indicates that economic activity is expanding.

Chart
Data by YCharts

Moreover, the commercial line utilization is still much below the pre-pandemic level. This means there is an opportunity for loan growth.

Line Utilization Wintrust Financial

2Q 2022 Earnings Presentation

Considering these factors, I'm expecting the loan portfolio to grow by 9% (annualized) every quarter till the end of 2023. In my last report as well, I estimated loan growth of 9% (annualized) a quarter. However, I've significantly increased the full-year loan growth estimate for 2022 because of the surprising performance in the second quarter of 2022.

Meanwhile, I'm expecting other balance sheet items to grow in line with loans. The following table shows my balance sheet estimates.

FY18 FY19 FY20 FY21 FY22E FY23E
Financial Position
Net Loans 23,668 26,643 31,760 34,541 38,476 42,058
Growth of Net Loans 10.1% 12.6% 19.2% 8.8% 11.4% 9.3%
Other Earning Assets 4,685 6,935 9,801 12,252 11,363 12,421
Deposits 26,095 30,107 37,093 42,096 44,532 48,677
Borrowings and Sub-Debt 1,213 1,783 2,638 2,426 2,446 2,674
Common equity 3,143 3,566 3,703 4,086 4,503 4,935
Book Value Per Share ($) 55 62 64 71 77 84
Tangible BVPS ($) 44 50 52 59 65 72

Source: SEC Filings, Author's Estimates

(In USD million unless otherwise specified)

Variable-Rate Heavy Loan Portfolio Makes the Margin Moderately Rate Sensitive

Around 77% of total loans will re-price or mature within one year, according to details given in the earnings presentation. This proportion of loans includes variable-rate loans which made up 60% of total loans.

On the other hand, the large balance of investment securities will hold back the average earning-asset yield in a rising-rate environment. The securities portfolio, which made up 13% of total earning assets, had a long duration of 7.42 years, according to details given in the presentation. As a result, it can be safely assumed that most of the portfolio will not re-price upwards this year as market interest rates rise.

Further, interest-bearing deposits, excluding certificates of deposits, made up a sizable 58.8% of total deposits at the end of June 2022. These deposits will re-price soon after every rate hike.

The results of the management’s interest-rate sensitivity analysis given in the presentation showed that a 100-basis points hike in interest rates can boost the net interest income by a moderate 5.3% over twelve months.

Interest Rate Sensitivity Wintrust Financial

2Q 2022 Earnings Presentation

Considering these factors, I'm expecting the margin to grow by 20 basis points in the second half of 2022. As I'm expecting interest rates to plateau in early 2023 before declining in the latter part of next year, I'm anticipating the net interest margin to remain almost unchanged next year.

Provisioning to be Above Normal in the Second Half of 2022

Non-performing loans were 0.20% of total loans, while allowances were 0.68% of total loans at the end of June 2022. This coverage seems a bit tight in light of a high inflation environment which is proving to be stressful for borrowers. Therefore, I'm expecting the provision expenses to be higher than normal in the last two quarters of 2022. Further, the anticipated loan additions will require additional provisioning for expected loan losses.

Considering these factors, I'm expecting a net provision expense of around 0.31% (annualized) of total loans in the second half of 2022, which is higher than the historical average. For 2023, I'm expecting the net provision expense to make up 0.19% of total loans, which is close to the last five-year average.

Expecting Flattish Earnings for 2022

The anticipated loan growth and margin expansion will likely support an increase in earnings this year and the next. On the other hand, higher provision expenses will likely drag earnings this year. Overall, I'm expecting Wintrust Financial to report earnings of $7.41 per share for 2022, down by just 2% year-over-year. For 2023, I'm expecting earnings to increase by 18% to $8.78 per share. The following table shows my income statement estimates.

FY18 FY19 FY20 FY21 FY22E FY23E
Income Statement
Net interest income 965 1,055 1,040 1,125 1,370 1,592
Provision for loan losses 35 54 214 (59) 85 80
Non-interest income 356 407 604 586 524 495
Non-interest expense 826 928 1,040 1,133 1,177 1,272
Net income - Common Sh. 335 347 272 438 436 516
EPS - Diluted ($) 5.86 6.03 4.68 7.58 7.41 8.78

Source: SEC Filings, Author's Estimates

(In USD million unless otherwise specified)

In my last report on Wintrust Financial, I estimated earnings of $7.03 per share for 2022. I've increased my earnings estimate because I've revised upwards my loan growth estimate following the second quarter's phenomenal performance. Further, I've reduced my non-interest expense estimate because the company has shown greater expense discipline than I anticipated so far this 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, a stronger or longer-than-anticipated recession can increase the provisioning for expected loan losses beyond my estimates.

High Price Upside Warrants a Buy Rating

Wintrust Financial has a long-standing tradition of increasing its dividend every year. Given the earnings outlook, I'm expecting the company to increase its quarterly dividend by $0.02 per share in the first quarter of 2023. This will lead to a full-year dividend of $1.44 per share, which implies a payoff ratio of 16%. In comparison, the payout ratio averaged 17% in the last five years. My dividend estimate suggests a forward dividend yield of 1.7%.

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 1.49 in the past, as shown below.

FY17 FY18 FY19 FY20 FY21 Average
T. Book Value per Share ($) 41.1 44.0 48.5 52.1 58.9
Average Market Price ($) 74.6 85.8 69.3 47.9 78.2
Historical P/TB 1.81x 1.95x 1.43x 0.92x 1.33x 1.49x
Source: Company Financials, Yahoo Finance, Author's Estimates

Multiplying the average P/TB multiple with the forecast tangible book value per share of $65 gives a target price of $96.7 for the end of 2022. This price target implies a 13.7% upside from the September 7 closing price. The following table shows the sensitivity of the target price to the P/TB ratio.

P/TB Multiple 1.29x 1.39x 1.49x 1.59x 1.69x
TBVPS - Dec 2022 ($) 65.0 65.0 65.0 65.0 65.0
Target Price ($) 83.7 90.2 96.7 103.2 109.7
Market Price ($) 85.0 85.0 85.0 85.0 85.0
Upside/(Downside) (1.6)% 6.1% 13.7% 21.4% 29.0%
Source: Author's Estimates

The stock has traded at an average P/E ratio of around 12.7x in the past, as shown below.

FY17 FY18 FY19 FY20 FY21 Average
Earnings per Share ($) 4.40 5.86 6.03 4.68 7.58
Average Market Price ($) 74.6 85.8 69.3 47.9 78.2
Historical P/E 17.0x 14.7x 11.5x 10.2x 10.3x 12.7x
Source: Company Financials, Yahoo Finance, Author's Estimates

Multiplying the average P/E multiple with the forecast earnings per share of $7.41 gives a target price of $94.3 for the end of 2022. This price target implies a 10.9% upside from the September 7 closing price. The following table shows the sensitivity of the target price to the P/E ratio.

P/E Multiple 10.7x 11.7x 12.7x 13.7x 14.7x
EPS 2022 ($) 7.41 7.41 7.41 7.41 7.41
Target Price ($) 79.5 86.9 94.3 101.7 109.1
Market Price ($) 85.0 85.0 85.0 85.0 85.0
Upside/(Downside) (6.5)% 2.2% 10.9% 19.6% 28.3%
Source: Author's Estimates

Equally weighting the target prices from the two valuation methods gives a combined target price of $95.5, which implies a 12.3% upside from the current market price. Adding the forward dividend yield gives a total expected return of 14.0%. Hence, I’m maintaining a buy rating on Wintrust Financial.

This article was written by

Sheen Bay Research profile picture
2.72K Followers
Around 10 years of experience covering Banks and Macroeconomics. Passionate about discovering lucrative investments and generating alpha.

Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Disclaimer: This article is not financial advice. Investors are expected to consider their investment objectives and constraints before investing in the stock(s) mentioned in the article.

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