Jacqueline Nix
Earnings of WesBanco, Inc. (NASDAQ:WSBC) will most probably recover this year on the back of subdued loan growth. Moreover, the margin will continue to expand, albeit at a slower rate than last year. Recent and upcoming changes in the funding mix will hurt the pace of margin expansion. Overall, I’m expecting WesBanco to report earnings of $3.23 per share for 2023, up 7% year-over-year. Compared to my last report on the company, I haven’t changed my earnings estimate much. The year-end target price suggests a small downside from the current market price. Based on the total expected return, I’m maintaining a hold rating on WSBC stock.
Funding Measures to Limit Margin Expansion
The net interest margin expanded by 16 basis points in the fourth quarter of 2022 following a 30-basis points expansion for the third quarter of the year. Further expansion is likely because of a rate-sensitive loan portfolio and the ongoing up-rate cycle. I’m expecting the Federal Reserve to increase the fed funds rate by a further 50 basis points till the mid of 2023 and then hold the rate steady for the second half of the year.
However, recent changes on the liability side of the balance sheet will limit the margin expansion. WesBanco ran off a large balance of its certificates of deposits (“CD”) in the last quarter, as mentioned in the conference call. To bridge the resulting funding gap, the company made substantial borrowings from the Federal Home Loan Bank (“FHLB”) during the fourth quarter. FHLB borrowings rose to $705 million by the end of December from $57 million at the end of September 2022. These borrowings are quite costly; therefore, they will hurt the margin in the first quarter of the year when the full-quarter impact will be visible. According to details given in the earnings release, FHLB borrowings carried an average rate of 3.69%, which is much higher than the average rate of 0.57% for total interest-bearing deposits and 0.32% for CDs.
Moreover, the management is focusing on recovering its CD balances. As mentioned in the conference call, the management is looking to reintroduce some of its CD specials. Due to the ongoing up-rate cycle, new CDs will carry much higher rates than the CDs that were run off during the fourth quarter. Therefore, the deposit cost can be expected to rise further in 2023.
Considering these factors, I’m expecting the margin to remain mostly stable in the first half of 2023 and then rise by 10 basis points in the second half of the year once the up-rate cycle ends. Compared to my last report on the company, I haven’t changed my margin growth estimate for this year. However, my margin estimate is higher than the estimate given in my last report because the margin growth in the fourth quarter of 2022 beat my expectations.
Loan Growth to Decelerate After a Remarkable Year
WesBanco’s pace of loan growth rebounded in the fourth quarter after falling in the third quarter of the year. The portfolio grew by an impressive 4% during the last quarter, which took the full-year loan growth to 10%. A normalization of previously elevated commercial pay downs was the chief reason behind the recovery.
The management mentioned in the conference call that it is striving to achieve upper-single-digit loan growth for 2023. In my opinion, this target is a bit ambitious but not impossible to achieve. Currently, the economic factors affecting loan growth are mixed. WesBanco has exposure to several states and its loan portfolio is well-diversified geographically. Further, the loan portfolio is concentrated on commercial real estate (“CRE”) and commercial and industrial loans (“C&I”). As a result, the purchasing managers’ index is a good gauge of product demand. As shown below, the manufacturing PMI index is currently in the contractionary territory (below 50).
The labor market provides a much better outlook for loan growth than the manufacturing PMI index. The unemployment rate continues to remain near record lows and is showing no signs of a trend reversal.
Considering these factors, I’m expecting the loan portfolio to grow by 4% this year, which is much below the management’s target but higher than the compounded annual growth rate of 1.4% for the last three years.
Meanwhile, I’m expecting deposits to grow in line with loans. The following table shows my balance sheet estimates.
| Financial Position | FY18 | FY19 | FY20 | FY21 | FY22 | FY23E |
| Net Loans | 7,607 | 10,216 | 10,603 | 9,612 | 10,585 | 11,015 |
| Growth of Net Loans | 20.8% | 34.3% | 3.8% | (9.4)% | 10.1% | 4.1% |
| Other Earning Assets | 3,200 | 3,353 | 3,612 | 5,151 | 4,040 | 4,162 |
| Deposits | 8,832 | 11,004 | 12,429 | 13,566 | 13,131 | 13,664 |
| Borrowings and Sub-Debt | 1,535 | 1,898 | 983 | 459 | 1,121 | 1,144 |
| Common equity | 1,979 | 2,594 | 2,612 | 2,549 | 2,282 | 2,292 |
| Book Value Per Share ($) | 40.4 | 46.1 | 38.8 | 40.3 | 38.4 | 38.1 |
| Tangible BVPS ($) | 21.6 | 25.7 | 21.5 | 22.1 | 19.2 | 19.1 |
| Source: SEC Filings, Earnings Releases, Author’s Estimates(In USD million unless otherwise specified) | ||||||
Expecting Earnings to Grow by 7%
The anticipated loan growth and slight margin expansion will play key roles in earnings growth this year. Meanwhile, I’m expecting the provisioning for loan losses and operating expenses to remain near the historical average. Overall, I’m expecting WesBanco to report earnings of $3.23 per share for 2023, up 7% year-over-year. The following table shows my income statement estimates.
| Income Statement | FY18 | FY19 | FY20 | FY21 | FY22 | FY23E |
| Net interest income | 347 | 400 | 479 | 458 | 474 | 542 |
| Provision for loan losses | 8 | 11 | 108 | (64) | (2) | 12 |
| Non-interest income | 100 | 117 | 128 | 133 | 117 | 112 |
| Non-interest expense | 265 | 312 | 355 | 353 | 357 | 389 |
| Net income – Common Sh. | 143 | 159 | 119 | 232 | 182 | 195 |
| EPS – Diluted ($) | 2.92 | 2.83 | 1.77 | 3.53 | 3.02 | 3.23 |
| Source: SEC Filings, Earnings Releases, Author’s Estimates(In USD million unless otherwise specified) | ||||||
In my last report on WesBanco as well, I estimated earnings of $3.23 per share for 2023. My updated earnings estimate is barely changed even though I’ve tweaked all line items following the fourth quarter’s results. This is because the tweaks cancel each other out.
My estimates are based on certain macroeconomic assumptions that may not come to fruition. Therefore, actual earnings can differ materially from my estimates.
Maintaining a Hold Rating
WesBanco is offering a dividend yield of 3.8% at the current quarterly dividend rate of $0.35 per share. The earnings and dividend estimates suggest a payout ratio of 43% for 2023, which is close to the five-year average of 48%. Consequently, the dividend appears secure. WesBanco has only recently increased its dividend; therefore, I’m not expecting a dividend hike in the year ahead.
I’m using the historical price-to-tangible book (“P/TB”) and price-to-earnings (“P/E”) multiples to value WesBanco. The stock has traded at an average P/TB ratio of 1.52 in the past, as shown below.
| FY19 | FY20 | FY21 | FY22 | Average | ||
| T. Book Value per Share ($) | 25.7 | 21.5 | 22.1 | 19.2 | ||
| Average Market Price ($) | 38.1 | 25.3 | 34.7 | 35.3 | ||
| Historical P/TB | 1.48x | 1.17x | 1.57x | 1.84x | 1.52x | |
| Source: Company Financials, Yahoo Finance, Author’s Estimates | ||||||
Multiplying the average P/TB multiple with the forecast tangible book value per share of $19.1 gives a target price of $29.0 for the end of 2023. This price target implies a 22.1% downside from the February 16 closing price. The following table shows the sensitivity of the target price to the P/TB ratio.
| P/TB Multiple | 1.32x | 1.42x | 1.52x | 1.62x | 1.72x |
| TBVPS – Dec 2023 ($) | 19.1 | 19.1 | 19.1 | 19.1 | 19.1 |
| Target Price ($) | 25.1 | 27.1 | 29.0 | 30.9 | 32.8 |
| Market Price ($) | 37.2 | 37.2 | 37.2 | 37.2 | 37.2 |
| Upside/(Downside) | (32.4)% | (27.2)% | (22.1)% | (16.9)% | (11.8)% |
| Source: Author’s Estimates |
The stock has traded at an average P/E ratio of around 12.3x in the past, as shown below.
| FY19 | FY20 | FY21 | FY22 | Average | ||
| Earnings per Share ($) | 2.83 | 1.77 | 3.53 | 3.02 | ||
| Average Market Price ($) | 38.1 | 25.3 | 34.7 | 35.7 | ||
| Historical P/E | 13.5x | 14.3x | 9.8x | 11.8x | 12.3x | |
| Source: Company Financials, Yahoo Finance, Author’s Estimates | ||||||
Multiplying the average P/E multiple with the forecast earnings per share of $3.23 gives a target price of $39.9 for the end of 2023. This price target implies a 7.2% upside from the February 16 closing price. The following table shows the sensitivity of the target price to the P/E ratio.
| P/E Multiple | 10.3x | 11.3x | 12.3x | 13.3x | 14.3x |
| EPS – Dec 2023 ($) | 3.23 | 3.23 | 3.23 | 3.23 | 3.23 |
| Target Price ($) | 33.4 | 36.6 | 39.9 | 43.1 | 46.3 |
| Market Price ($) | 37.2 | 37.2 | 37.2 | 37.2 | 37.2 |
| Upside/(Downside) | (10.2)% | (1.5)% | 7.2% | 15.9% | 24.6% |
| Source: Author’s Estimates |
Equally weighting the target prices from the two valuation methods gives a combined target price of $34.4, which implies a 7.4% downside from the current market price. Adding the forward dividend yield gives a total expected return of negative 3.7%. Hence, I’m maintaining a hold rating on WesBanco, Inc.
