Webster Financial has been treading water for the past six months, recording a small return of 4.9% while holding steady at $58.68.
Is there a buying opportunity in Webster Financial, or does it present a risk to your portfolio? See what our analysts have to say in our full research report, it’s free.
Why Is Webster Financial Not Exciting?
We're cautious about Webster Financial. Here are three reasons why you should be careful with WBS and a stock we'd rather own.
1. Revenue Growth Flatlining
Long-term growth is the most important, but within financials, a stretched historical view may miss recent interest rate changes and market returns. Webster Financial’s recent performance shows its demand has slowed significantly as its revenue was flat over the last two years. 
Note: Quarters not shown were determined to be outliers, impacted by outsized investment gains/losses that are not indicative of the recurring fundamentals of the business.
2. Efficiency Ratio Expected to Falter
The underlying profitability of top-line growth determines the actual bottom-line impact. Banking institutions measure this dynamic using the efficiency ratio, which is calculated by dividing non-interest expenses like personnel, facilities, technology, and marketing by total revenue.
Markets understand that a bank’s expense base depends on its revenue mix and what mostly drives share price performance is the change in this ratio, rather than its absolute value. It’s somewhat counterintuitive, but a lower efficiency ratio is better.
For the next 12 months, Wall Street expects Webster Financial to become less profitable as it anticipates an efficiency ratio of 48.5% compared to 45.8% over the past year.
3. High Interest Expenses Increase Risk
Leverage is core to the bank’s business model (loans funded by deposits) and to ensure their stability, regulators require certain levels of capital and liquidity, focusing on a bank’s Tier 1 capital ratio.
Tier 1 capital is the highest-quality capital that a bank holds, consisting primarily of common stock and retained earnings, but also physical gold. It serves as the primary cushion against losses and is the first line of defense in times of financial distress.
This capital is divided by risk-weighted assets to derive the Tier 1 capital ratio. Risk-weighted means that cash and US treasury securities are assigned little risk while unsecured consumer loans and equity investments get much higher risk weights, for example.
New regulation after the 2008 financial crisis requires that all banks must maintain a Tier 1 capital ratio greater than 4.5% On top of this, there are additional buffers based on scale, risk profile, and other regulatory classifications, so that at the end of the day, banks generally must maintain a 7-10% ratio at minimum.
Over the last two years, Webster Financial has averaged a Tier 1 capital ratio of 11.5%, which is considered unsafe in the event of a black swan or if macro or market conditions suddenly deteriorate. For this reason alone, we will be crossing it off our shopping list.
Final Judgment
Webster Financial isn’t a terrible business, but it doesn’t pass our bar. That said, the stock currently trades at 1× forward P/B (or $58.68 per share). While this valuation is fair, the upside isn’t great compared to the potential downside. We're fairly confident there are better investments elsewhere. We’d suggest looking at the most entrenched endpoint security platform on the market.
Stocks We Would Buy Instead of Webster Financial
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