WesBanco

Moat: 2/5

Understandability: 2/5

Balance Sheet Health: 4/5

WesBanco is a multi-state, diversified financial services holding company offering a range of banking products and services to customers through its subsidiaries.

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

WesBanco, headquartered in Wheeling, West Virginia, operates a network of community banking branches, primarily in West Virginia, Ohio, Pennsylvania, Kentucky, and Indiana. The company’s business model spans a variety of financial services, including:

  • Community Banking: This is WesBanco’s core business segment, offering traditional banking services like checking and savings accounts, loans, mortgages, and other similar products to individual customers and small businesses.
  • Trust and Investment Management: WesBanco provides trust and investment management services, offering advisory and fiduciary services to its clients. These services include investment management, financial planning, and estate planning.
  • Insurance: WesBanco offers its customers access to insurance services, including property, casualty, life and other types of policies, through its subsidiary, WesBanco Insurance Services.
  • Brokerage: WesBanco provides brokerage services, offering products such as stocks and bonds, to help its customers make trades in the market.
  • Other: This included operations like commercial real estate services and other certain ancillary services.

Industry Trends: The financial services industry is characterized by several key trends.

  • Rising Interest Rates: Increase in the interest rates are a big topic now that the central bank has increased these rates to curb inflation. The rising interest rates affect the bank by increasing their income from loans but it also increases their cost of borrowing.
  • Digital Banking: Technology has greatly shaped this industry and clients expect better digital experiences, such as mobile banking.
  • Consolidation: Banks are merging with other banks to increase their reach and cut costs.
  • Competition: With fintech companies coming in and providing new financial services that disrupt traditional banking, competition is getting stiffer.

Moat Analysis

Based on current data and financial reports, here is my assessment of WesBanco’s moat:

Moat Rating: 2 / 5

  • Limited Moat: While WesBanco possesses certain advantages, they do not translate into a durable and wide economic moat.
    • The company has a geographically diverse network of branches with high concentration in its operating markets. This makes it more difficult for competitors to enter the market directly, but it’s not impossible.
    • It has a lot of loyal local customers in the area. This is a small advantage that makes it stickier.
  • Why Not Higher:
    • Standardized Products: Its products (loans, mortgages, deposits) are not highly differentiated and are easily replicated. As such, the bank is mostly a price taker instead of having pricing power.
    • Switching costs are low: Customers can easily change banks and there are a lot of options available for the same services as WesBanco.
  • Intangible assets like branding is weak: Compared to big players in the industry like JP Morgan, WesBanco does not have a brand that would make it difficult to compete with it. It is just an average bank, nothing too special.

Risks to the Moat

  • Interest Rate Sensitivity: The bank’s earnings are highly sensitive to changes in interest rates. While rising interest rates increase its income from loans, higher interest rates are also likely to decrease demand for loans and may affect the value of its investments, thus reducing their returns.
  • Technological Disruption: Fintech companies could erode the value of banks by providing new, and cheaper financial services that are more convenient for its clients.
  • Competition: With the consolidation of the banking sector, the competition may intensify as bigger players might move into areas served by WesBanco and create a price war, reducing WesBanco’s profit margins.
  • Regulatory Challenges: Regulations are constantly changing, especially for banks. Changes in the regulations could affect the ability of the bank to make profits.

Business Resilience

While these risks are genuine, WesBanco shows a decent amount of resilience because:

  • Geographic Diversification: The bank is spread across multiple states and has many clients. Therefore it may weather any disruption in any particular area.
  • History of Strong Execution: Despite a low moat, the management has a history of executing well. If anyone can keep the company alive despite the structural weaknesses, it’s them.
  • Conservative lending: Banks are particularly vulnerable to bad loans, especially during recessions, and therefore conservative lending is necessary to stay afloat during bad times.

Financial Analysis

Recent Performance: WesBanco has produced solid results, with a growth in their revenue. In the latest quarter (3Q2023), the bank’s net revenue increased to 174.3 million, compared to the previous year where net revenue was $162 million.

  • This increase in income has been driven by growth in net interest margin.

Income Statement Analysis:

  • Net Interest Income (NII): A significant portion of the bank’s income is derived from net interest income, the difference between interest income and interest expenses. In 3Q2023, net interest income was around 143.2 million, compared to 131.6 million in 3Q2022. The increase in NII is due to the high rates that were set by the central bank. The bank, in 3Q2023, was able to get interest rates of around 7% on its loans.
  • Non-Interest Income: It includes fees for advisory services, service charges for various types of accounts, and trading and brokerage income. Non-interest income was about 20% of total revenue in 3Q2023.
  • Operating Expenses: A great portion of expenses are personnel-related, such as wages and benefits. And other operating costs include regulatory compliance, marketing, communications, etc. As percentage of total revenues, operating expenses were around 56%.

Balance Sheet Analysis:

  • Assets: The majority of assets comprise of loans held for the purpose of generating interest income. These loans are mostly from commercial and retail sectors. WesBanco’s assets as of Sept 2023 were around $17.8 billion, out of which about $12 billion is given as loans.
  • Liabilities: Liabilities are primarily composed of customer deposits and debts. As of September 2023, customer deposits were about $15.9 billion. While total debts were about $1.8 billion.
  • Equity: Equity includes funds contributed by shareholders, plus retained profits that were earned during their operations over years, which are used for growing the business operations. As of September 2023, total equity was at $1.9 billion.

Profitability & Efficiency Analysis

  • ROIC: ROIC, which is one of the most important metrics that shows how efficiently the company is using its capital, was 1.7% in 2022 and 1.4% in 2023. A higher rate is preferred. Also, ROIC without goodwill was 6.7% and 4.9% in 2022 and 2023, respectively, which means the company is acquiring goodwill at high prices, and is not making value from these acquisitions. These high ROICs should not be trusted given the overall economic conditions.
  • ROE: Return on equity is about 9.5% and 8.7% in 2022 and 2023 respectively. A high ROE is preferred.

Management’s Remarks on Financial Performance:

  • Management believes that they are well positioned for the future due to the strong management team, robust capital levels, and conservative credit culture.
  • Management acknowledges that a more challenging environment lies ahead, but believe their business fundamentals will allow them to perform adequately through the challenging times.

Recent Concerns:

  • The management acknowledges that their net interest margin might fall due to higher cost of deposits compared to higher interest rates.
  • The bank has faced a decline in their noninterest income due to a slowdown in mortgage banking.

Understandability: 2 / 5

  • WesBanco’s operations are of medium complexity, with a mix of traditional banking and other financial services. While the core banking model of lending and borrowing is easy to understand, it can be difficult for a person with little knowledge of finance to make any informed decisions about the bank, especially with all the different regulations, business lines, and financial jargons.
  • The large amount of financial statements and their complexity makes it very challenging to completely understand the business and derive value from it.

Balance Sheet Health: 4 / 5

  • WesBanco maintains a healthy financial position, as their equity makes up 10% of the total assets, making them reasonably solvent to handle defaults in loans.
  • The bank’s reliance on debt has not gone up either and it has maintained relatively consistent debt to assets ratio.
  • Even though the bank did face some challenges due to rising rates, it still was able to produce positive income and cash flows, signifying that its business model is still strong despite headwinds.

The combination of a limited moat and the cyclical nature of the business is quite dangerous. You should consider that when making investment decisions.