Wintrust Financial Corporation

Moat: 2/5

Understandability: 3/5

Balance Sheet Health: 4/5

Wintrust Financial Corporation is a financial holding company providing community banking, specialty finance, and wealth management services primarily in the greater Chicago and Wisconsin areas.

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.

Wintrust Financial Corporation operates in the highly competitive financial services industry, and there’s no clear evidence that it possesses a wide economic moat. Its main business is providing banking and financial services, which are readily replicated, making it challenging to differentiate itself from other community banks or larger financial institutions. Therefore, it scores a 2/5 on its moat rating.

Business Overview

Wintrust Financial Corporation (WTFC) is a financial holding company, structured around three primary operating segments:

  • Community Banking: This is the core of WTFC’s business, comprising community banks, which serve local individuals and businesses, offering retail and commercial banking services. They operate through multiple branches primarily located in the Chicago metropolitan area and southern Wisconsin.

Community banking is the largest component of the company with roughly 60% of revenue share.

  • Specialty Finance: This segment includes lending and leasing businesses, providing loans for premium financing and equipment financing, including municipal financing. The company’s operations are not limited to niche markets.
  • Wealth Management: This area provides trust, investment, and brokerage services to high-net-worth individuals. It also manages investment portfolios and advises in financial planning.

Revenue Distribution

Wintrust’s revenue model is diversified, spanning different financial activities across community banking, specialty finance, and wealth management. The company’s reliance on community banking indicates a stable income stream, while specialty finance and wealth management segments provide growth opportunities. Here’s the revenue break up:

  • Net Interest Income contributes to the largest chunk of revenues.
  • Noninterest income comprised of brokerage income, wealth management, and lending related fees, etc., makes up for the rest.
  • The banking industry is undergoing digital transformation, with customers increasingly preferring online and mobile banking.
  • The market is highly competitive, marked by the presence of many local and large banks, credit unions, and fintech players.
  • Regulatory pressures are significant, including ongoing concerns over data security, cybersecurity, and compliance requirements.
  • The banking industry is heavily influenced by macroeconomic forces, such as inflation, rising rates and the general economic outlook.
  • Merger and acquisition activities are very prevalent, leading to industry consolidation.

What Makes the Company Different

  • Local-market focus: The concentration of operations in and around the Chicago and southern Wisconsin regions allows for strong community ties and brand recognition.
  • High-level service: The provision of personalized service to individual customers and small to medium-sized businesses helps establish a sticky customer base.
  • Diversified offerings: The combination of community banking with specialty finance and wealth management provides a more diversified portfolio than many other community banks.

Financial Analysis

Balance Sheet Health: 4/5

While a highly-levered business (as is typical for banks), Wintrust’s balance sheet is reasonably strong, reflecting a well-capitalized operation that’s subject to regulatory oversight.

  • Wintrust has a total of $50.4 Billion in assets as of September 2023.
  • The company maintains a robust loan portfolio of $39.8 Billion, encompassing commercial, real estate, and consumer loans.
  • The liability side of the balance sheet is mainly comprised of deposits, which are its primary source of funding.

Here’s a breakdown:

  • The Tier 1 capital ratio, a regulatory measure of the company’s capital strength, has declined and is at 10.3%.
  • The company’s loan-to-deposit ratio is about 85% , indicating it uses the deposits to generate loans.
  • The ratio of loans to assets, in other words, leverage is 78%.
  • The company has enough liquidity (cash and short-term investments) to cover 17% of total assets.

Profitability and Performance:

  • The company’s net income has had good growth with a current TTM net income of $698 million.
  • ROA is 1.08%, which is good for banks.
  • ROE is 12.7%, which means that it is adequately utilizing the shareholder’s capital.
  • The company’s net interest margin is quite good at 3.59%.
  • Its operating expense is quite high at 71.5% of revenue, and this should be kept in check.
  • The revenue mix appears diverse enough so as not to have too much reliance on any single part of the business.

Recent Concerns/Controversies

  • The net interest income saw a decline in Q2 of 2023 but has started recovering in Q3 of 2023.
  • Non-performing assets are being monitored, but nothing concerning.
  • The company has a high level of loans in CRE.
  • Management stated that all their investments are high quality.
  • Management highlighted that they are monitoring regulatory guidelines closely and are being proactive in risk assessment.
  • Management is looking forward to the next year and thinks the interest rates will stabilize.
  • Management is focused on revenue growth in the coming year.
  • Management is expecting a modest increase in expenses.

Moat Rating: 2 / 5

Wintrust has a narrow economic moat, mostly because of switching costs and some scale benefits from operations within their local network. However, barriers to entry are low in financial services, especially if you compare it to technology, healthcare, or branded goods.

  • Switching Costs: Wintrust builds a large amount of switching costs, because the switching process between banks is complex for both retail and business customers. This results in higher retention rates than the average bank. However, these are not high enough to give it much pricing power.
  • Scale advantages: The scale of Wintrust’s regional branch network, and it’s integration into those local communities, creates small but significant cost advantages versus some smaller firms.

Understandability: 3 / 5

While banking operations are complex, WTFC’s business model is mostly straightforward. One of the common things that makes the banks complicated is the balance sheet and its leverage, which is inherently risky. It operates in 3 clearly defined business lines and the company explains its operations well making the business somewhat understandable to an educated investor, especially if that person has some accounting experience.

Risks to the Moat and Business Resilience

  • Regulatory Changes: Increased regulation could severely affect the profitability of Wintrust. Changes in interest rates and government monetary policy can also pose challenges.
  • Macroeconomic Risks: The banking sector is highly sensitive to economic downturns or rising interest rates which could increase loan defaults.
  • Competition: Intense competition from larger banks and fintech companies can diminish earnings.
  • Data Breaches and Cyber Security: Banks are more and more susceptible to cyber security issues and breaches.
  • Technological Disruption: A sudden change in technology might impact the entire industry making their current business model irrelevant.
  • Credit quality and interest rates: Changes in interest rates can impact the borrower’s ability to pay, leading to higher defaults and a decrease in Net interest income for Wintrust. Also, changes in the credit rating of their customers can affect profitability.

Despite these risks, Wintrust has shown good performance over the past few years. This suggests that there are some resilience built-in. With consistent and prudent capital deployment, and a diverse set of businesses, the company is well-equipped to withstand several different economic and industry headwinds. While Wintrust may not have a “wide moat,” it may be able to continue its performance and create long-term sustainable shareholder value.