Morgan Stanley Downgraded Webster Financial, But Why?

In a report published Thursday, Morgan Stanley analyst Ken A Zerbe downgraded the rating on

from Equal-weight to Underweight, while raising the price target from $34 to $36. The analyst believes that the stock valuation is not justified by the in-line earnings growth and profit being delivered by Webster Financial. "The market's enthusiasm over WBS's growing health savings account (HSA) business has resulted in an unsustainable valuation multiple, in our view. While we are positive on HSA growth, we believe in-line earnings growth and profitability will drive multiple compression from current lofty levels," Zerbe said. Although the stock has historically traded at a discount to its peers, the recent expansion and growth of the HSA business, which led to improvement in core fundamentals, is likely to support a valuation multiple more in-line with the peer average. "Yet in the market's rush to capture this improvement, the stock has overshot fair value, implying roughly 10 percent downside to the shares as its multiple contracts," the Morgan Stanley report stated.