Tactical Shifts And New Tools Could Hamper Bank's Growth And Profit Margins

Key Takeaways

• Shifting focus from asset growth to improve capital ratios may hinder revenue and earnings potential.
  
• Efforts to control expenses and manage credit in a tough market signal caution towards long-term profitability.
  
• Washington Trust Bancorp's strategic financial management, aimed at enhancing deposit growth, controlling costs, and strengthening asset quality, forecasts improved profitability and operational resilience.

Catalysts

Operates as the bank holding company for The Washington Trust Company, of Westerly that provides various banking and financial services to individuals and businesses.

• The strategic shift to deemphasize asset growth to improve capital ratios may limit the bank's revenue growth potential, impacting future earnings.
  
• The implementation of new deposit growth tools and opening a new branch indicate investment in growth but could increase operational expenses without an immediate return in revenue, influencing net margins.
  
• A significant shift from brokered deposits to Federal Home Loan Bank borrowings, followed by a strategy to replenish brokered deposits, suggests potential instability in funding sources which could impact net interest margins (NIM).
  
• The sale of the operations center and the optimization of occupancy efficiency could lead to short-term cost savings, but the bank will need to continuously find similar efficiency gains to sustain its operating margin.
  
• The bank's focus on controlling expenses and managing credit in a challenging environment implies caution towards future growth prospects, potentially affecting long-term profitability.

Assumptions

• Analysts are assuming Washington Trust Bancorp's revenue will grow by 3.1% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 24.2% today to 18.0% in 3 years time.
• Analysts expect earnings to reach $37.4 million (and earnings per share of $2.17) by about September 2027, down from $45.8 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 17.2x on those 2027 earnings, up from 12.2x today. This future PE is greater than the current PE for the US Banks industry at 11.8x.
• Analysts expect the number of shares outstanding to grow by 0.23% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 8.66%, as per the Simply Wall St company report.

Risks

• The introduction of new deposit growth-oriented tools to improve online account opening, bank switching, and customer referral rewards can enhance deposit growth and improve funding stability, positively affecting Washington Trust Bancorp's net interest margins and overall financial health.
  
• The strategic sale of the operations center and the optimization of occupancy efficiency demonstrate proactive cost control measures, potentially leading to reduced operating expenses and improved profitability margins.
  
• Wealth and Mortgage fee-based businesses generated higher revenues in the quarter, hinting at strong performance in non-interest income segments which can buffer against interest rate fluctuations and contribute positively to the bank's overall revenue and earnings.
  
• An improvement in capital ratios, as a result of de-emphasizing asset growth and stabilizing earnings, suggests a strengthening balance sheet which could support future growth and resilience, positively impacting investor confidence and possibly stock price.
  
• Solid asset quality metrics, with low levels of non-accruing and past due loans, indicate effective risk management and credit quality control, reducing the risk of significant loan losses and supporting profitability and earnings stability.

Valuation

• The analysts have a consensus price target of $29.5 for Washington Trust Bancorp based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $207.4 million, earnings will come to $37.4 million, and it would be trading on a PE ratio of 17.2x, assuming you use a discount rate of 8.7%.
  
• Given the current share price of $32.63, the analyst's price target of $29.5 is 10.6% 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.