Washington Federal, Inc.

Moat: 2/5

Understandability: 2/5

Balance Sheet Health: 4/5

Washington Federal is a regional bank, primarily operating in the Western United States, with a focus on providing loans and collecting deposits while maintaining conservative lending practices.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview: WAFD is a regional bank, operating primarily in the states of Washington, Oregon, Idaho, Arizona, Utah, Nevada, New Mexico, California, and Texas. Their core business revolves around:

Lending: Primarily focusing on commercial and real estate loans, with a secondary emphasis on consumer loans. Within commercial loans they focus on multi-family, commercial real estate, and commercial and industrial loans.
Deposits: Offering a variety of deposit accounts to individuals and businesses, including checking, savings, and money market accounts. The funds are then used to generate a spread in interest when deployed via loans.

The bank’s strategy focuses on community-oriented banking, emphasizing conservative lending practices and relationship-based banking with its customers. They have a history of organic growth and have also expanded through acquisitions.

Revenue Distribution: WAFD’s revenues are generated primarily from:

Net interest income: The difference between interest earned on loans and other investments and interest paid on deposits and other borrowings, typically makes up around 70% of their revenue.
Non-interest income: Includes fees and commissions from services like deposit-related fees, service charges, mortgage banking fees, and other operating activities.

A significant portion of their revenues is concentrated in the Pacific Northwest, with a notable presence in the Southwestern US, in more recent years, including California and Texas.

Industry Trends & Competitive Landscape:

Rising Interest Rates: The recent rise in interest rates, driven by the Federal Reserve, has had a mixed impact. While WAFD should benefit from higher yields on new loans, they have also seen interest expense rise for their existing liability portfolio and for deposits.
Regional Competition: The banking industry is highly competitive, especially in the regional sector, where local banks often compete aggressively for customers. WAFD also faces competition from larger national banks and credit unions, as well as emerging fintech companies.
Consolidation: The banking sector continues to consolidate, with larger players acquiring smaller ones to achieve economies of scale and expand market share. This also means that the amount of regional banks are shrinking over time.
Technological Advancements: Digital banking, mobile platforms, and online services are becoming increasingly important for attracting and retaining customers. Banks must invest in technology to compete.
Credit Risk: There is an increased level of uncertainty for future credit quality, particularly with the increasing number of adjustable-rate loans and the possibility of a recession.
Regulations: Regulations like Dodd-Frank and the Bank Secrecy Act put requirements on the banks, increasing costs.

What Makes WAFD Different?

Conservative Lending Practices: WAFD is known for its adherence to conservative lending practices, which have helped the bank avoid many of the worst effects of past credit crises. They have a long history of having a strong reserve in place for troubled loans.
Relationship-Focused Banking: Their emphasis on customer relationships and personalized service offers a contrast to the larger, more impersonal national banks.
Geographic Strengths: While they are growing in many states, they still benefit from the strong and stable Pacific Northwest economy and also the developing markets of California and Texas.

Financials:

Income Statement: WAFD generates a significant amount of revenue from its net interest income, as they are a traditional savings and loan. In its most recent annual report, WAFD recorded $1.721 billion of Net Interest Income from $2.504 billion of Interest income. However, they also had $782 million of interest expense. In contrast, their income from fees is relatively low at around 0.24 billion for the year. For the year, the bank recorded a total revenue of $1.899 billion and a total net income of $0.494 billion.
The net profit margin is approximately 26%, which shows how profitable WAFD is.
We need to be mindful of current interest rate increases and their effect on their net interest income. * For 9 months ended June 30 2023, net interest income for WAFD was 583 million compared with 412 million for same period last year. This growth has come from increased interest rates on loans.
Net income was $434.71 million compared with $207.27 million last year. * The management expects this growth to slow down in future quarters. This would have a negative impact on future cashflows.
Loan Quality: WAFD generally has an excellent loan portfolio quality, as of 30 Sept 2023, their non-performing loans were just 0.51% of their loans. This is extremely low compared with the average bank, indicating strength of their underwriting standards.
Profitability: WAFD continues to generate high returns on equity, which is around 12.2 percent for 2023.
This is above average in the industry.
Capital: As of 30 September 2023, WAfd has 15.58% total risk-based capital, and 13.3% tier 1 risk-based capital. This is a sign of stability and the ability of the company to withstand economic turmoil.
WAFD’s Tier 1 capital is a source of strength for the bank.
Recent Issues: In the most recent earnings call, WAFD management recognized the effect of increasing interest rates on their cost of funds and the slowing of loan origination. However, they mentioned that their liability portfolio is primarily fixed, which would help the bank in a changing interest rate environment. The company was also subject to certain criticism from analysts because their cost of deposits was higher than its peers. The company management said that they will work towards lowering those costs in the future.
Also, after many years of consistent and high net interest margin the management expects a slight slowdown to a more realistic long-term level.
The company had a 2.6% annual stock buyback and declared 0.24$ dividend per share quarterly. This shows a lot of cash flow generation and a focus on returning capital to shareholders.

Legitimate Risks:

Interest Rate Risk: As interest rates change it will affect their profitability as they are dependent on spread.
Credit Risk: Although current provisions are low, they may increase during periods of economic stress.
Increased Competition: Increased competition from other banks and emerging fintech companies may hamper future prospects.
Regulatory Changes: Stricter and more costly regulations may make it more difficult to be competitive.
Acquisition integration: The bank has historically grown through acquisitions. Integrating new businesses and teams may prove tricky and time consuming.
Customer Retention: While the bank has a good long-term customer base, retaining and increasing customer base will remain important to future growth.

Business Resilience: WAFD’s business model is relatively resilient due to the following:

Conservative lending strategy: Helps them in navigating through bad economic cycles.
Proven management team: The team has experience in managing multiple economic cycles.
Strong and loyal customer base: Provides stability and gives predictable incomes.
Good balance sheet and liquidity: The bank is well capitalized and has sufficient liquidity.

Moat Rating: 2 / 5 WAFD has a narrow moat. Their competitive advantages are limited because they are primarily regional and do not have great economies of scale or network effects. The moat comes from their customer lock-in due to relationship-oriented banking, low cost of deposits, and a high barrier to entry due to banking regulations. This moat is unlikely to create superior returns compared with its peers in the long term.

Understandability: 2 / 5 The core business of WAFD is fairly easy to understand, it provides loans and accepts deposits. However, the nuances of a bank are complex including their risk and capital structure and therefore it might not be an easy business to deeply understand, and requires the investor to delve deep into the business and understand banking regulations. The different ways banks make money also makes it complex to analyze.

Balance Sheet Health: 4 / 5 The bank’s balance sheet is very healthy and it has a good capital structure, a low risk profile of loans, and strong cash flow generation. The management also actively buys back stock, returning cash to the shareholders. This makes WAFD a very stable and reliable bank. The only issue that they face is a higher cost of deposits compared to their peers. However, they also have many levers to reduce them and return to historical levels, if needed.