On Mar 18, 2013, we reaffirmed our Neutral recommendation on
Washington Federal Inc.
) on its better-than-expected results, meaningful capital
deployment actions and robust asset quality. Though the company
is enjoying the benefits of lower rates, the benefits of deposit
repricing will be badly affected once the rates start rising.
Why the Neutral Stance?
Washington Federal's fiscal first quarter (ended Dec 31) earnings
per share beat the Zacks Consensus Estimate by a penny. This also
marked an improvement from the year-ago earnings. Constantly
declining credit costs primarily drove the results. However,
higher operating expenses and lower top line were the headwinds.
Further, in the past 60 days, none of the estimates has moved up,
keeping the Zacks Consensus Estimate unchanged for 2013.
Estimates for 2014 have also remained almost flat over the same
period. In addition, over the past 4 quarters, the average
earnings surprise has been a decent 4.9% for the company.
Washington Federal's credit quality continues to improve with the
contraction of nonperforming assets and net charge-offs. Further,
management expects credit costs to continue declining. We
anticipate the credit quality to continue improving in the
subsequent quarters with the gradual recovery of the housing
sector. Moreover, management's efforts to enhance shareholder
value through regular dividend hikes and buybacks make it an
asset for yield seeking investors.
Yet, the ill effects of the stabilization of interest rates make
us wary. The anticipated improvement in the interest-rate
environment is likely to ruin its efforts to strengthen interest
margin through deposit re-pricing. Also, Washington Federal's
investment in traditional assets like prime residential mortgage
loans and AAA-rated mortgage-backed securities, which are funded
largely by customer deposits with maturities of 1 year or less,
will be marred by rising interest rates. Improvement in low
interest rate scenario has the potential to compress the margin
between fixed asset returns and variable funding costs,
pressurizing the profit.
Further, we remain concerned about the company's considerable
exposure to real estate markets, which are highly perilous.
Other Stocks to Consider
Other stocks that are performing better than Washington Federal
First Defiance Financial Corp.
Meta Financial Group, Inc.
Flagstar Bancorp Inc.
). All these carry a Zacks Rank #1 (Strong Buy).
META FINL GRP (CASH): Free Stock Analysis
FLAGSTAR BANCP (FBC): Free Stock Analysis
FIRST DEFIANCE (FDEF): Free Stock Analysis
WASH FEDL INC (WAFD): Free Stock Analysis
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