Analyst Touts Washington Federal Upside

SEATTLE ( TheStreet) -- Saying Washington Federal ( WFSL) was "on track to drive improved profitability going forward as credit costs continue to decline," McAdams Wright Ragen analyst Sara Hasan reiterated Monday her buy rating for the shares, and $23 price target.

The target price would represent a 51% return for investors, based on Friday's closing stock price of $15.26.

After meeting with Washington Federal's CFO Brent Beardall, Hasan said that with the company having repaid the Troubled Assets Relief Program, or TARP, and with "credit costs falling, we think the future looks bright for WFSL and its robust capital balance." Adding that organic growth "remains challenging today," Hasan explained that acquisitions "are a likely option" for deploying excess capital, although Washington Federal's discipline on pricing "may limit its standing as an acquirer-of-choice."

Hasan estimate that the company had enough excess capital to support "an additional $2-3 billion in assets."

The company had $13.5 billion in total assets of September 30, and a tangible common equity ratio of 11.98%, which was the second-highest among the largest 50 U.S. bank and thrift holding companies, according to data from Securities and Exchange Commission filings supplied by SNL Financial.

For the third quarter, Washington Federal reported net income of $16 million, or 14 cents a share, improving from $9.6 million, or 11 cents a share a year earlier. For the company's fiscal 2010 ended September 30, net income was $118.7 million, or $1.05 a share, compared to $40.7 million, or 46 cents a share, for fiscal 2009. Earnings for the full fiscal year were boosted by a $54.8 million after-tax gain on the bargain purchase of the failed Horizon Bank of Bellingham, Wash. from the Federal Deposit Insurance Corp. in January.

The company's annualized ratio of net charge-offs - loan losses less recoveries - to average loans for the third quarter was 1.69%, which was low compared to the national aggregate third-quarter net charge-off ratio of 2.32% reported by the FDIC. Washington Federal's third-quarter provision for loan loss reserves was $26 million, increasing from $20.7 million in the second quarter but declining from $42.6 million in the third quarter of 2009.

Loan loss reserves declined $10.3 million during the third quarter, following the trend for several of the largest U.S. banks which have seen earnings boosted this year from releases of loan loss reserves. Citigroup's ( C) loan loss reserves declined by $2.5 billion during the third quarter and Bank of America ( BAC) and JPMorgan Chase ( JPM) each had reserves declining by $1.7 billion during the quarter.

Washington Federal is one of the most efficient bank or thrift holding companies in the country, with a third-quarter efficiency ratio of 32.19%, according to SNL Financial. A bank or thrift's efficiency ratio is essentially its noninterest expense divided by its interest and noninterest income. Washington Federal has the second-best efficiency ratio among the largest 50 U.S. bank and thrift holding companies, trailing Hudson City Bancorp ( HCBK) with an efficiency ratio of 22.55%, but ahead of New York Community Bancorp ( NYB), which had an efficiency ratio of 35.82%.

Hasan said the company's management indicated that "in an absence of organic or acquisition growth opportunities, it intends to return capital to shareholders through dividends or share buybacks."

While she expressed disappointment that the company entered into a Memorandum of Understanding with the Office of Thrift Supervision in June, Hasan said that "governance-related actions" required of Washington Federal were "substantially complete," and emphasized that the MOU didn't include anything related to the company's capital levels of restrictions on dividend payments or acquisitions.

The MOU required Washington Federal to develop a written enterprise risk management program, enhance its construction lending and portfolio management procedures, improve business continuity, security and information technology planning and improve its compliance with lending rules.

Hasan justified her price target saying that Washington Federal's shares were trading at a discount to her $16.37 projected book value for the end of Fiscal 2011, and that over the previous 20 years the shares had traded in a range of 1.3 to 1.9 times forward book value. "With an enviable competitive position and signs of improvement on the horizon, we find the risk-reward ratio on WFSL to be very attractive," she said.

RELATED STORIES:


-- Written by Philip van Doorn in Jupiter, Fla.

To contact the writer, click here: Philip van Doorn.

To follow the writer on Twitter, go to http://twitter.com/PhilipvanDoorn.

To submit a news tip, send an email to: tips@thestreet.com.

Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for TheStreet.com Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.

More from Stocks

Stocks Trade Mixed Amid Progress on U.S.-China Trade; Dow Turns Lower

Stocks Trade Mixed Amid Progress on U.S.-China Trade; Dow Turns Lower

Micron Shares Soar; Chipmaker Is 'Managing for Profitability' Now, Says Analyst

Micron Shares Soar; Chipmaker Is 'Managing for Profitability' Now, Says Analyst

Big Banks' Shift to Digital Could Bring These Significant Shareholder Benefits

Big Banks' Shift to Digital Could Bring These Significant Shareholder Benefits

Red Hot Micron Is Still One Heck of a Bargain

Red Hot Micron Is Still One Heck of a Bargain

Stacey Cunningham: From Intern to Head of the New York Stock Exchange

Stacey Cunningham: From Intern to Head of the New York Stock Exchange