WSFS Financial Corporation

Moat: 2/5

Understandability: 2/5

Balance Sheet Health: 4/5

WSFS Financial Corporation is a diversified financial services company, offering retail and commercial banking, wealth management, and insurance services, primarily in the Mid-Atlantic region of the US.

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 and Competitive Landscape

WSFS Financial Corporation operates as a diversified financial services company, serving primarily the Delaware Valley and the Mid-Atlantic region. Its primary business segments include:

  • Core Banking: This segment offers a wide range of lending and deposit products to both retail and commercial customers, including real estate, commercial, consumer, and industrial loans, alongside deposit accounts such as checking, savings, and money market accounts.
  • Wealth Management: This segment provides financial planning, investment management, trust, and estate services to high-net-worth individuals, families, and institutions.
  • Cash Connect: This segment provides ATM cash management services, primarily to retail establishments and other businesses.
  • Other: This segment includes services like insurance and non-recurring revenues.

The financial services industry is inherently competitive. Banks are differentiated primarily by the level of customer service, the convenience of access, the range of products and services, and lending rates and terms offered. Competition in the banking sector typically comes from a variety of players:

  • Large national banks: These institutions have the benefit of scale and greater brand awareness, but may lack a local focus and tailored services.
  • Other regional banks: Competing institutions that have more geographical coverage and might have higher expertise in particular areas.
  • Local banks and credit unions: Smaller community-focused financial institutions that have strong local presence.
  • Fintech companies: New digital platforms are increasingly disrupting traditional banking channels with more streamlined and often lower-cost services.
  • Wealth Management Firms: Large national firms and also regional ones specializing in wealth management services.

WSFS tries to differentiate itself through high-touch relationship banking and its community focus. It has been described as a “community bank”, which could be a differentiator in the regions it operates and could help it keep the customer base. However, it has a small reach, mostly concentrated in Pennsylvania, New Jersey, and Delaware, which limits it and makes it very dependent on the performance of these economies.

Financials in Detail

WSFS’s financial performance can be analyzed through these key areas:

  • Net Interest Income: This is the heart of a lending operation. It comes from the interest paid on loans, minus interest paid on deposits. In recent times, because of increased interest rates, banks were able to increase their net interest income as their variable loan rates increased more quickly than deposit costs. However, with a potential drop in interest rates in the near future, the income is vulnerable as the yield curves changes.
  • Fee and Commission Income: These types of income are produced from sources like investment management and fiduciary activities, as well as services like ATM and other cash management. These revenues have had a good growth in the recent years.
  • Credit Quality: This is the assessment of the bank’s loan book to see what portion of the loans are expected to result in losses. In the recent reports, we can see a reduction in charge-offs, which is great because that means the loan book is pretty secure. But it also means there isn’t much room for improving earnings. As far as loan growth, we have to see how the current credit quality requirements will affect future performance in a more uncertain macroeconomic outlook.
  • Capitalization: This is an assessment of the assets compared to debt. WSFS has increased its CET1 ratios, giving it more room to face any downturns in the economy. It is very important to see how they choose to increase their equity in the following months.
  • Profitability: A key metric for a financial institution is profitability. We have seen a significant increase in the past years.
  • Operating Expenses: The ability to keep the operating costs under control are essential for any financial institution. Most banks are focusing on leveraging technology to bring down expenses.

Overall, the financials seem quite healthy at the moment, with good profit and stability. However, there is a possibility of changing circumstances that must be looked at.

Moat Analysis

WSFS has a very narrow moat, and it mostly stems from its local brand in its operational areas. This offers some protection, but it is not a very large moat and therefore its moat is given a rating of 2/5.

Here’s a more detailed breakdown:

  • Local Brand and Customer Loyalty: As a community-focused bank, WSFS tries to foster local relationships and customer loyalty. This is a moat because it leads to greater stickiness of deposits and also an improved access to the local areas. However, this advantage is limited to its current areas of operation, which makes a very limited moat.
  • Switching Costs: Banks do benefit from customer inertia; people tend to stick with their current bank unless there are significant reasons to change. This is also limited in the sense that it is often not enough to prevent a customer going to a different bank for better services.
  • Economies of Scale: As it gets larger, WSFS has a better ability to spread fixed costs and is more efficient with certain services like technology. However, bigger players are more efficient and therefore they may not be an edge compared to other national banks.

Legitimate Risks and Business Resilience

Several risks could hurt WSFS’s business and its moat:

  • Interest Rate Risk: A core driver of banks profitability is the interest rate. However, that means they are vulnerable to changes in interest rates. Any substantial and prolonged downturn in rates could hurt its revenues.
  • Credit Risk: Deterioration in credit quality in the loan book could lead to higher losses, especially during a downturn in the economy. WSFS is making sure to follow all necessary guidelines to maintain the credit quality in the loan book, which is a good sign.
  • Competition: It is a very competitive market and big players or more innovative fintechs could take away customers from WSFS.
  • Macroeconomic Conditions: The recent high interest rate environment as well as current economic slowdown might lead to less loan growth and a decrease in other activities for the bank.
  • Regulatory Changes: A change in regulation could always cause some disruptions for the banking sector. WSFS has to maintain the regulatory requirements all the time.

Despite these risks, WSFS has shown that it has good resilience because of its strong liquidity and high tier-1 capital. However, there might be limitations to its resilience given the uncertainty regarding the future outlook of the US economy. It has managed well through past economic downturns as well.

Understandability

The business of banking and especially financial institutions are difficult to analyze and deeply understand. Therefore, the understandability of this is given a rating of 2/5. Here is why:

  • Complexity of Financials: The financial statements of a bank are complex and very different than other businesses. Understanding things like loans, leases, loan loss provisions, derivatives etc. are not trivial.
  • External Variables: Banks are very vulnerable to external variables and are therefore harder to understand and evaluate. Macroeconomic and political changes impact them greatly.
  • Regulation: Banks are heavily regulated, which adds another layer of complexity to understanding the business.
  • Competition: Intense competition and the ability of new players to enter easily can make the business harder to understand.

Balance Sheet Health

WSFS has a very good balance sheet. Therefore, it is given a rating of 4/5

  • Liquidity: WSFS has very strong liquidity. Liquidity is the ability of an asset to be converted into cash without significant loss. WSFS, being a bank has a lot of assets that can be converted into cash easily. This also signals that they have enough liquid cash readily available if the need be.
  • Tier 1 Capital: With a solid CET1 ratio of 10.4%, WSFS has a great cushion to take any losses. A high tier-1 capital ratio also reduces the overall risk of a bank.
  • Debt Structure: WSFS also has a pretty good mix of debts. Having no or little long-term debt also indicates great liquidity and ability to pay off short-term liabilities.
  • Asset Quality: Although there have been some volatility, loan loss provisions remain quite low, which also signals good asset quality.

However, a negative can be that the bank has a large amount of fixed-rate loans, so any increases in interest rates don’t directly translate into a higher interest yield. The bank also has a small exposure to commercial real estate, which is also something investors must pay attention to.

Recent Concerns/Controversies

In the latest earnings call, the management pointed to the following : * They expect the interest rates to have a smaller effect in the coming quarters compared to last year. * Although they see a good economy in the areas they operate, their borrowers have started to take a pause and look carefully before applying to loans. * They are increasing the scrutiny on loans, keeping credit quality at the best possible levels. * They are investing heavily into their digital channels.

Overall, the management seems very confident about the future and their ability to navigate it.

Summary

WSFS is a well-managed financial services company with a reasonable moat in a very competitive sector. It has a strong focus on profitability and efficiency, but has to focus on improving its brand equity as well. While there is inherent risk associated with the sector, the company has a healthy balance sheet and is well-managed to navigate those risks. The company’s limited moat, the volatile nature of interest rates, and dependence on local markets are major drawbacks to its growth prospects.