Build 2030 Shift Toward Commercial Banking Will Drive Long Term Earnings Resilience

Catalysts

About WaFd

WaFd is a digitally enabled regional bank focused on serving businesses and consumers across the Western United States.

What are the underlying business or industry changes driving this perspective?

• The Build 2030 shift toward true commercial banking and small business relationships, including reorganized business, corporate and commercial real estate banking teams, positions WaFd to grow higher yielding C&I and CRE loans, supporting faster revenue and earnings growth.
• Ongoing runoff of low yielding single family mortgage loans and redeployment into higher yielding agency mortgage backed securities with no credit risk should structurally lift asset yields and net interest margin over time, improving net income.
• Strategic focus on treasury management, fraud controls and digital tools for business clients, including in house technology from Pike Street Labs and small business platforms like Treasury Express, is likely to deepen relationships and expand low cost deposits, benefiting funding costs and net interest margin.
• Expansion into SBA 504 and 7(a) lending with delegated and preferred lender status, coupled with a growing loan pipeline across multifamily, C&I and construction, supports sustained mid single to low double digit growth in the active loan book, driving revenue and fee income.
• The launch and targeted scaling of WaFd Wealth Management to at least $1 billion of assets under management, alongside growing insurance revenue, diversifies noninterest income streams and can mitigate margin pressure, supporting more resilient earnings.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming WaFd's revenue will grow by 7.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from 29.5% today to 30.4% in 3 years time.
• Analysts expect earnings to reach $269.3 million (and earnings per share of $3.67) by about December 2028, up from $211.4 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 9.1x on those 2028 earnings, down from 11.7x today. This future PE is lower than the current PE for the US Banks industry at 11.7x.
• Analysts expect the number of shares outstanding to decline by 5.95% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.46%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• The Build 2030 strategy aims to shift WaFd from a thrift model toward higher yielding commercial and small business banking, with management targeting 8% to 12% growth in the active loan portfolio and a mix improvement in noninterest-bearing deposits. If achieved, this could accelerate revenue growth and expand net interest margin, lifting earnings above current expectations.
• Secular easing in interest rates, combined with WaFd’s asset sensitivity and ability to aggressively reprice deposits downward now that the loan-to-deposit ratio is in the low 90s, may result in faster than anticipated margin expansion as funding costs fall more quickly than asset yields. This could improve net interest income and net income.
• Strong digital capabilities through Pike Street Labs, enhanced small business platforms like Treasury Express and CashFlow Central, and the launch of WaFd Wealth Management with a goal of $1 billion in assets under management create structural advantages in attracting and deepening client relationships. These factors could drive sustained growth in fee income and improve overall profitability and return on equity.
• Intentional runoff of high cost Luther Burbank deposits, redeployment of low yielding single family mortgages into higher yielding agency mortgage backed securities with no credit risk, and a still strong capital and credit profile mean WaFd is positioned to benefit disproportionately from any upturn in loan demand and industry wide bank M&A or deposit insurance reforms. This could support higher valuation multiples and long term earnings growth.
• While credit metrics have modestly deteriorated due to elevated rates and economic uncertainty, net charge offs remain very low and criticized loans are diversified by sector. A sustained environment of easing rates and stable credit quality could reduce credit costs over time and allow more of the bank’s growing revenue base to flow through to net income and margins.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The analysts have a consensus price target of $31.0 for WaFd based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• In order for you to agree with the analysts, you'd need to believe that by 2028, revenues will be $886.1 million, earnings will come to $269.3 million, and it would be trading on a PE ratio of 9.1x, assuming you use a discount rate of 7.5%.
  
• Given the current share price of $32.2, the analyst price target of $31.0 is 3.9% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.