Talent Additions And Technology Investments Will Strengthen Wealth & Trust Business

Key Takeaways

• Investments in technology and talent are driving growth in Wealth & Trust, enhancing fee revenue and net margins.
  
• Strategic management of deposit rates and nonperforming assets aims to stabilize net interest margins and limit credit losses.
  
• Vulnerabilities in the Cash Connect business model, asset quality concerns, and flat consumer loan growth could impact profitability and future revenue.

Catalysts

Operates as the savings and loan holding company for the Wilmington Savings Fund Society, FSB that provides various banking services in the United States.

• WSFS Financial anticipates continued double-digit growth in its Wealth & Trust business due to recent talent additions and technology investments, which is expected to drive fee revenue and improve overall net margins.
  
• The company is focusing on optimizing cash logistics and leveraging pricing power in its Cash Connect business to drive profit margins higher, despite a projected decline in revenue due to interest rate reductions. This should ultimately contribute positively to earnings.
  
• WSFS is actively managing deposit rates and expects a strategic use of interest-bearing deposit beta to sustain a stable net interest margin, targeting approximately 3.80% for 2025. This approach should support revenue and earnings stability even during interest rate cuts.
  
• Strategic investments in talent, particularly in Wealth, Commercial, and Technology, aim to strengthen client relationships and expand service offerings, which should drive future revenue growth and enhance net margins.
  
• The company's focus on reducing nonperforming assets and maintaining strong asset collateralization is expected to limit credit losses and enhance profitability, contributing to a more stable earnings outlook.

WSFS Financial Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming WSFS Financial's revenue will grow by 6.6% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 26.8% today to 22.7% in 3 years time.
• Analysts expect earnings to reach $270.8 million (and earnings per share of $4.78) by about January 2028, up from $263.7 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 15.2x on those 2028 earnings, up from 12.4x today. This future PE is greater than the current PE for the US Banks industry at 12.3x.
• Analysts expect the number of shares outstanding to decline by 1.28% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 5.92%, as per the Simply Wall St company report.

WSFS Financial Future Earnings Per Share Growth

Risks

• The termination of a long-standing Cash Connect client led to a significant negative $4.7 million pretax impact, which could affect future Core Fee revenue and noninterest expenses, indicating a vulnerability in the Cash Connect business model and impacting profitability.
  
• The company expects a decline in Cash Connect revenues due to interest rate reductions, which, although offset by decreased funding costs, may still pose a risk to profit margins if rate decreases occur beyond expectations.
  
• Nonperforming assets increased due to the migration of a $40 million relationship involving two loans, raising concerns about asset quality and potential future loan loss provisions impacting earnings.
  
• The unpredictability in net charge-offs, expected to be between 35 to 45 basis points of average loans for the year, highlights credit risk that could affect net margins if economic conditions or underwriting standards worsen.
  
• The consumer loan portfolio is expected to remain flat as the Upstart and Spring EQ partnership portfolios run off. This could limit growth in consumer loan segments, affecting overall loan growth and revenue.

Valuation

• The analysts have a consensus price target of $61.8 for WSFS Financial based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $68.0, and the most bearish reporting a price target of just $53.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $1.2 billion, earnings will come to $270.8 million, and it would be trading on a PE ratio of 15.2x, assuming you use a discount rate of 5.9%.
  
• Given the current share price of $55.52, the analyst's price target of $61.8 is 10.2% higher.
  
• 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.