Webster Financial Offers An Appealing Menu Of Positives For This Next Cycle

 

Even though the Street still has its issues with banks doing large M&A, sentiment has definitely improved around Webster Financial (WBS), with the shares outperforming its peers (and the S&P 500) by a healthy margin since my last update. I'd like to think that the Street is waking up to the longer-term strategic and financial advantages of the deal, but I suspect it has more to do with Webster having above-average asset sensitivity going into a tightening cycle.

With the Sterling deal now done, I think there are a lot of positives for the coming years. I like the increased focus on commercial lending, and I think there are good specialty niches that Webster can exploit in this up-cycle. I also like that above-average rate sensitivity, as well as the prospects for post-deal cost synergies, though that will be a two or three-year process to fully realize. With double-digit annualized return potential from here, I think Webster is still a stock worth considering as it becomes one of the largest players in its footprint.

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Webster Financial Offers An Appealing Menu Of Positives For This Next Cycle

Webster Financial Looks Undervalued On Its Post-Merger Potential, But It Has To Convince A Skeptical Market

 

The market has generally not rewarded banks who’ve announced whole bank acquisitions, and particularly mergers of equals. In keeping with that, Webster Financial (WBS) shares have underperformed the regional bank index by about 500bp since the April announced of its merger of equals with metro NYC Sterling Bancorp (STL).

I understand the rationale for the deal, but I can also understand why investors would be disappointed that Webster became a hunter instead of the hunted, and I can likewise understand some concern about buying into the NYC multifamily market, though I think Sterling is often not really appreciated by the market for the changes it has been making to strategically reposition itself for the long term.

With second quarter earnings in hand, I think Webster is undervalued to a pretty significant degree, and I think that unless there are serious issues in integrating the two banks, investors can reasonably expect a double-digit total annualized long-term from these levels.

 

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Webster Financial Looks Undervalued On Its Post-Merger Potential, But It Has To Convince A Skeptical Market