Author Topic: WBS - Webster Financial  (Read 5965 times)

Schwab711

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Re: WBS - Webster Financial
« Reply #10 on: August 23, 2016, 09:55:54 AM »
I looked through the Kerrisdale report, here are some of my thoughts:

1. The fair value they come up with is $46.26 per share (as of March 2015). The current stock price is $37.48. That implies a ~25% upside.

2. The DCF valuation that Kerrisdale comes up with is $1.5 billion for the HSA bank. This seems aggressive. The terminal value is 2.5x tangible book value. There are only 20, in an universe of 1,000 publicly traded banks and thrifts that trade at a P/TBV over 250%. Maybe the market will be different in 2024, but that's certainly not a conservative assumption in 2016. The terminal value accounts for 107% of the total present value. It actually should be higher since Webster carries an equity to assets ratio of 10%.

3. It's really hard to organically grow deposits at 20% per year by the time you're at $10 billion in deposits. If you screen for all FDIC insured institutions that have grown at over 15% per year in 2012 - 2015, there are only four institutions that have achieved that starting with assets over $2.5 billion: Synchrony Bank, Signature Bank, Morgan Stanley Private Bank, and Sallie Mae Bank.

4. I think the market views the HSA bank more or less appropriately at $600mm - $800mm - which makes sense given the P/E multiples oddballstocks cited on $50mm in net income. That would be roughly 20% of Webster's market cap, which again makes sense given HSA bank's size as a portion of the rest of Webster.

2/4. Why is there such a large discrepancy between your multiple for HSA Bank and the market's multiple of HQY? How did you arrive at 12x-14x multiple as FV? That would be less than WBS's multiple. Would you really not buy HSA Bank stock if it were trading at 15x-20x earnings? I definitely would, which is probably the easiest way to sum up the thesis.

The wide discrepancy in acquisition multiples between large/small companies in the same industry is the entire theory behind platforms/roll-ups (or brands in consumer goods). I think HSA is a fantastic candidate for a roll-up. I could see why others would be skeptical.

In general, predicting that the HSA industry will be larger in the future is about as sure of a thing as you can find when it comes to the forecasting. Both the government and insurers support it and individuals are heavily incentivized to use them like 401(k)s. HSAs have an advantage over 401(k)s in the sense that any withdraws for medical use after the age of 65 are tax free (unlike IRAs). If you do withdraw for personal use after 65, there is currently no penalty so at worst they are equivalent.

3. I don't think anyone is suggesting overall deposits will rise 20%/yr. Only that the HSA market is projected to grow by that amount.

The most recent HSA Industry report came out a week ago. Total D + I continues to grow. Individual admins will obviously be lumpier. HSA Bank did lose their #1 position with Optum Bank's acquisition and lost some market share.

http://www.devenir.com/devenirWP/wp-content/uploads/2016-Midyear-Devenir-HSA-Market-Research-Report-Executive-Summary.pdf
« Last Edit: August 23, 2016, 10:05:13 AM by Schwab711 »


vox

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Re: WBS - Webster Financial
« Reply #11 on: August 23, 2016, 01:01:14 PM »
It seems that HQY is a fintech company with a completely different business strategy and financial structure than WBS. You wouldn't just apply Chipotle's P/E multiple to every casual restaurant.

I think an independent HSA Bank would have a different investment portfolio and non-interest expense burdens than is currently being allocated as a division of Webster.

The deposit growth I was referencing is from page 40 of the Kerrisdale which shows HSA Bank deposits going from $9.2 billion in 2020 to $19.2 billion in 2024. Maybe they'll be able to do that, but it seems optimistic to me.

Schwab711

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Re: WBS - Webster Financial
« Reply #12 on: August 24, 2016, 09:50:31 AM »
I agree, there would be some additional costs from a separate management team and costs of being public, but HSA Bank's segment results should be a fair approximation. If not, it raises other issues. The difference in investment portfolios of HQY and HSA Bank (or Optum) is a bank charter, which allows them to hold/invest their deposits. I'm pretty sure HQY sells their deposits as brokered deposits to partner banks.

I'm not really sure what is special about the fintech label. HQY, HSA Bank, and Optum Bank are all HSA (ERISA plan) admins and custodians. They all do the exact same thing with slightly different customer relationships. HQY is different in the sense that they do not have a bank charter, which has certain consequences and benefits. HSA Bank and Optum are glorified banks that are more akin to traditional trust/custodian businesses. The real long-term money in this business is going to come from the interchange fees from customers spending their account balances, which is why I think being a bank is going to have an advantage. In the mean time, the regulatory obligations for HSA Bank and Optum Bank are more than offset by the NIM on deposits.

HQY doesn't seem to have any discernible technology or healthcare advantage over HSA Bank or Optum at present. HQY has low organic growth and their market share is almost completely due to acquisitions. HSA Bank has displayed above-average organic growth in many years, including recently. HSA Bank also seems to be the industry thought leader when it comes to publishing white papers and the like. If anything, I think HQY has a disadvantage in many areas of the business.

The deposit growth on p.40 is for HSA Bank only. The HSA market projections may be a little aggressive but there's reason to believe that 10%+ is reasonable for the next decade. See my comments on incentives combined with very low market penetration of these plans. Beyond that, Kerrisdale simply multiplied HSA Bank's market share at publication by the projected market size.

Schwab711

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Re: WBS - Webster Financial
« Reply #13 on: September 12, 2016, 12:30:11 PM »
http://seekingalpha.com/news/3208209-lender-calls-higher-rates-jpmorgans-dimon-speaks

This is becoming a near certainty. If not September, then it seems like it will happen by the end of the year. I don't know of a bank that stands to benefit more on a proportional basis then WBS. I believe each 25 bp hike lifts earnings by roughly 8%-10%, with AFS securities considered (~12% of assets v. ~55% of assets benefiting). Going forward, the benefit should be even greater. I'm not sure how much I can improve accuracy without having more detailed info, but I think WBS has a lot of tailwinds.

vox

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Re: WBS - Webster Financial
« Reply #14 on: September 12, 2016, 01:36:21 PM »
I think you are drastically overestimating the effect of a 25 bp interest rate hike.

From the Asset/Liability Management and Market Risk section of the company's 6/30/16 10-Q:

"The following table summarizes the estimated impact that gradual parallel changes in income of 100 and 200 basis points, over a twelve month period starting June 30, 2016 and December 31, 2015, might have on Webster’s NII for the subsequent twelve month period compared to NII assuming no change in interest rates:
            
NII / +100bp / +200bp
June 30, 2016 / 2.1% / 4.3%
December 31, 2015 / 1.6% / 3.2%"

In other words, a gradual 100 bp parallel upwards shift in the interest rate curve would increase net income by $10 million per year after tax ($700 million LTM net interest income * 2.1% * (1 - 32% tax rate)), which is approximately 5% of their net income.
« Last Edit: September 12, 2016, 01:38:20 PM by vox »

Schwab711

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Re: WBS - Webster Financial
« Reply #15 on: September 21, 2016, 08:17:59 AM »
I agree, way too aggressive. I should have considered the reasonability before posting. I also believe that the interest rate sensitivity table underestimates WBS's book. Among other things, these tables make very conservative estimates on cost of deposits and fed funds rate that I think underestimate the impact to WBS. I think these tables provide reasonable estimates for most banks. I may ultimately agree that it is reasonable for WBS, but I don't at the moment.

I definitely made a huge mistake by not factoring in the IR derivative book. They have a lot of hedges, which I should have assumed with such a large variable/commercial book. You are right that my above estimates for a rate hike are worthless. I need to spend more time thinking about this. I'm trying to make a more accurate estimate with insufficient data, so I expect to make many more mistakes along the way. Either way, the core thesis is still the HSA Bank holding which I still have confidence in.

One interesting point that I haven't mentioned yet and which could be a major risk at some point is the note that many of WBS's hedges are with their "customers" (and non-netted!). I'm becoming more confident that a lot of their commercial deals are with institutional investors (loan + hedge with II). It would explain the loan growth. Being HQ'd in CT certainly factored into this belief. I haven't seen any questions in CCs about it, but maybe I missed one. WBS could be highly exposed to a strong downturn in the US economy or commercial real estate (well above-average exposure). I think it would take a 2008-2009-type drop, but I have to spend more time thinking about this as well. Anyone have thoughts on whether I'm underestimating the risk here?

Schwab711

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Re: WBS - Webster Financial
« Reply #16 on: November 08, 2017, 02:54:58 PM »
WBS is probably my favorite LT play. It's not an overnight double but HSA Bank is an amazing asset for a regional bank. I think it will do well from here.

As mentioned, my original guess was nonsense. However, despite a flatter yield curve, 3 rate hikes have led to NIM expansion of 22 bps. It was driven entirely by and YOA expansion, primarily due to variable book, less rate cap hedges (COD was essentially flat). Offset slightly by decreased risk in loan book. The funding advantage seems to be very real. Most banks saw a double-digit bp increase in funding costs over the period. HSA deposits are roughly 24% of total deposits (from 22% at last post).

HSA Bank had a $75.6m EBT run-rate in 3Q17. JPM values HQY at 22x EBITDA (according to latest sell-side report). Not necessarily apples-to-apples but they would probably value HSA Bank in the neighborhood of $1.65b (approximately 33% of WBS's market cap).

Since the last post, total HSA deposits are up 22.8% to an estimated $44.7b
http://www.devenir.com/wp-content/uploads/2017-Midyear-Devenir-HSA-Market-Research-Report-Executive-Summary.pdf

Throw in a potential corporate tax cut and WBS has some nice potential catalysts.
« Last Edit: April 19, 2018, 08:38:21 AM by Schwab711 »

Schwab711

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Re: WBS - Webster Financial
« Reply #17 on: April 19, 2018, 08:37:53 AM »
HSA Bank EBT run-rate is up to nearly $100m as of 1Q 2018. The operating leverage is starting to ramp.
HQY looks to be trading at ~55x EBT. Based on peer multiples, HSA Bank is roughly worth WBS's entire market cap.
Edit: I'll try to be a little more consistent here. HQY is trading at 35x fwd EBITDA. That puts HSA Bank at closer to $3.5b without adjustment for whatever D/A may be.

Efficiency ratio fell below 60% in 1Q 2018.

NIM expansion of 33bps y/y this Q. The majority of the portfolio is variable rate loans and a majority of deposits are roughly fixed around 0%. I haven't found a bank that is better positioned for the current yield curve and stated intentions of the Fed.

I still think WBS is the best long-term risk/reward play in the US. There are a lot of tailwinds at play.

1Q18 Presentation Slides:
https://webster.gcs-web.com/static-files/b4d3f28c-50a9-496b-98db-888982787f14

1Q18 Supplemental Slides:
https://webster.gcs-web.com/static-files/80c44016-14cb-4c73-bf15-0e25e2bd3d6b
« Last Edit: April 19, 2018, 08:48:36 AM by Schwab711 »