We are maintaining our Neutral recommendation on
Washington Federal Inc.
) as we believe that the risk-reward profile for the company is
currently balanced. Our decision is based on the company's
better-than-expected second quarter 2012 results. However, we
remain wary of its considerable exposure to perilous real estate
Washington Federal reported fiscal third quarter (ended June 30)
earnings of 33 cents per share, beating the Zacks Consensus
Estimate. Higher net unrealized gains along with persistently
declining credit costs contributed to the improved results.
However, higher operating expenses and a reduction in net interest
income were the headwinds. On the whole, continuous enhancement in
asset quality and improved capital ratios were impressive.
As Washington Federal primarily generates revenue from public
deposits, which it then disburses in the form of loans of various
types, growth of loans and deposits, indicate a strong business
trend. Though loans and deposits have been down in the recent
quarters, primarily due to the prepayment of high-cost borrowings
and sluggish demand, Washington Federal has had a long-term upward
trend in terms of loan and deposit growth. The company generated
net loans of $7.9 billion at the end of fiscal year 2011 (up from
$6.0 billion in 2006), representing 59.0% of its total assets.
Further, Washington Federal's credit quality continues to improve
with the contraction of nonperforming assets and net charge-offs
and falling credit costs. In addition, in response to
stabilizing credit conditions, the company has been reducing its
provision for loan losses in recent quarters. We anticipate the
credit quality to continue improving in the subsequent quarters
with the gradual recovery of the housing sector.
Washington Federal remains an attractive pick for yield-seeking
investors due to its extensive capital deployment activities. In
December 2011, Washington Federal increased its quarterly cash
dividend by 33% to 8 cents and has maintained the same level since.
Also, the company continues to buy back shares.
In June 2011, Washington Federal announced an authorization to
repurchase 10 million shares. This is an extension of its previous
authorization of about 22 million shares, which was announced in
1995 with no expiration date.
We believe that such efforts will help the company to gain
substantial market share and enhance its profitability in the long
run. Yet, upward revisions in interest rates will ruin its efforts
to strengthen net interest margin through deposit re-pricing.
In addition, Washington Federal's loan portfolio comprises high
quality single-family residential loans, which has a huge
percentage of non-acquired and non-accrual loans. Further, it is
exposed to land acquisition & development and speculative
construction loan portfolios, which remain extremely risky.
Over the last two years, the bulk of nonperforming loans and
charge-offs had risen from these portfolios. Though it has been
reducing its exposure to them, we do not anticipate the company to
shed the burden completely anytime soon.
STERLING FIN WA (STSA): Free Stock Analysis
WASH FEDL INC (WAFD): Free Stock Analysis
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Moreover, Washington Federal seeks to moderate the risks inherent
in its loan portfolio by sticking to specific underwriting
practices. Even if the company's underwriting criteria are
satisfactory for the various kinds of loans it offers, like other
companies, it may incur losses on loans that meet its underwriting
criteria. Under current economic conditions, the company's
allowance for loan losses may not be adequate to cover actual
losses as it is based on the company's historical loss experience.
Shares of Washington Federal currently retain a Zacks #3 Rank,
which translates into a short-term Hold rating. One of its peers
Sterling Financial Corp.
) retains a Zacks #1 Rank, which translates into a short-term
Strong Buy rating.