Washington Federal Warrants 'Caution, Curve Ahead,' Says Macquarie

In a report rolled out Thursday, Macquarieanalyst Russell Gunther recommended being cautious regarding Washington Federal Inc. WAFD, reiterating and Underperform rating and $18 price target on the stock.

The company has managed to deliver solid returns (ROAA, ROATCE), in line with peers, on the back of “high quality capital and credit metrics, coupled with what is currently best-in-class capital return and efficiency.” In addition, a recent change in the company’s strategic business model, to more commercial bank-like has fueled revenue diversification and ameliorated the funding profile.

However, with shares trading just off all time highs, at 14.8 times consensus estimates for 2016, and 1.4 times the tangible book value, Macquarie sees the positives already reflected in the stock price. Furthermore, the analysts perceive “downward pressure on both EPS growth and valuation multiples” as they believe Washington Federal’s balance sheet composition puts it in a bad position in relation to its peers amidst a rising rate environment, “and under multiple yield curve scenarios. Related sensitivity implies downside from current levels; however, our counter consensus rate forecast and view of the shape of the yield curve implies meaningful underperformance,” the report explains.

In addition, Macquarie anticipates a flattening curve for interest rates, with short-term rates surging faster than long-term ones. This scenario might prove quite challenging for Washington Federal, as it has the potential to create meaningful NIM pressure.

“Shape of curve drives negative EPS growth, mean reversion”

The analysts at Macquarie expect to see negative earnings growth and falling consensus estimates for Washington Federal. They also say they see a mean reversion in the company’s earnings multiple “as the shape of the interest rate curve potentially changes.” While they anticipate 2.4 percent EPS growth in 2015, they are modeling a 6.5 percent decline in earnings for 2016 and a further 3.4 percent drop for 2017.