Wintrust Financial Stock: Banking On More Gains

With a market capitalization as of this writing of nearly $6 billion, Wintrust Financial Corporation (NASDAQ:WTFC) is one of the larger banks that I like to write about. In the middle of June of last year, I wrote a bullish article wherein I discussed the tumble that the stock had seen following the start of the banking crisis. This drop was, at least to me, largely unwarranted. This was especially true after seeing how the company fared from a deposit perspective. Add on top of this other factors such as how quickly the firm’s top and bottom lines had grown, and I felt comfortable with the ‘buy’ rating I assigned it at that time.

Since then, things have gone remarkably well. The S&P 500 is up a hefty 12.4%. But by comparison, Wintrust Financial has seen an upside of 36.8%. Truthfully, the stock is no longer the bargain that it once was. But even in spite of that, shares do look attractively priced compared to similar banks of a similar size. Add on top of this the quality of the assets that the institution owns and the continued growth seen in deposits over the past few quarters, and I believe that a soft ‘buy’ is still appropriate at this time.

Just barely okay

Earlier this year, the management team at Wintrust Financial announced financial results covering the final quarter of the 2023 fiscal year. In some respects, things went quite well. In others, they did not. As an example, let’s take the top line and bottom line performance of the institution during this window of time. Net interest income actually rose from $409.2 million in the final quarter of 2022 to $427.1 million in the final quarter of 2023. Even though the bank saw a decline in its net interest margin from 3.71% to 3.62% on a year over year basis, the overall growth in its balance sheet more than offset this. Non-interest income also increased, climbing from $93.8 million to $100.8 million. Despite this, however, the firm saw its net profits drop from $137.8 million to $116.5 million. This decline was driven by a $43.7 million payment that the company had to make to the FDIC for insurance purposes. That compares to the $6.8 million payment reported the same time one year earlier.

The good news, is that, even with this worsening on the bottom line, the overall picture for 2023 relative to 2022 when it came to a profit perspective was positive. As the chart above illustrates, net profits of $594.7 million beat out the $481.7 million reported one year earlier. Outside of the income picture, there were other areas of improvement. The most significant involved deposits. These managed to climb to $45.40 billion by the end of 2023. That’s up nicely from the $42.90 billion reported at the end of 2022. In fact, in every quarter since the end of the first quarter, the institution has seen an improvement in the value of its deposits.

Other parts of the company’s balance sheet have changed as well. The value of loans, for instance, also climbed to a high of $42.13 billion. That’s up from the $39.15 billion they stood out as of the end of the 2022 fiscal year. The value of securities went up slightly from $7.22 billion to $7.71 billion. And even cash managed to rise, inching up from $2.48 billion to $2.51 billion. Unfortunately, debt also increased. But that increase was very modest from $3.60 billion to $3.66 billion. That’s definitely a tolerable change.

With the overall growth of the institution, we also saw an increase in its book value and tangible book value. These ended the 2023 fiscal year at $81.43 and $70.33, respectively. By comparison, at the end of 2022, they were at $72.12 and $61.00, respectively. This translates to year over year gains of 12.9% and 15.3%, respectively. Such an improvement, particularly during a difficult year, is a great thing for investors to see. It shows that management is continuing to translate profits and cash flows into a net value position.

Speaking of book value, now might be a good time to start talking about the valuation of the company more generally. At present, the firm is trading at a price to book multiple of 1.18 and at a price to tangible book value of 1.37. In the chart above, you can see how these numbers stack up against five similar banks that I decided to compare Wintrust Financial to. What I found is that, when it came to the price to book approach, only one of the five companies was more expensive than our prospect. But when it involved the price to tangible book value, our candidate ended up being the cheapest of the group.

There are other ways to value a bank. Another approach is to use the price to earnings multiple. Using data from the 2023 fiscal year, Wintrust Financial is trading at a price to earnings multiple of 10. As you can see in the chart above, the five firms that I compared it to range between a 9.2 and a 13.9. Only one of the five ended up being cheaper than our candidate. This is interesting because, when we take all three valuation approaches, two of the three show that Wintrust Financial is cheaper than most of the other players, while the other one shows that it’s one of the most expensive. In general, believe that following two approaches is more important than following a single one. So to me, while shares might not be the cheapest compared to what else I have seen in the banking sector, they are cheap relative to comparable firms.

We also need to pay attention to asset quality. Sometimes, companies deserve to trade at a discount to other players. And other times, they deserve to trade at a premium. In the chart above, you can see the return on equity of our candidate, as well as the five firms that I’m comparing it to. In this case, four of the five have a lower return on equity than our candidate. I then repeated the analysis using the return on assets in the chart below. Once again, four of the five end up having a lower return than Wintrust Financial does.

Takeaway

From what I can tell, Wintrust Financial is doing quite well for itself. On an absolute basis, shares are not terribly attractive to me. But compared to similar firms, the stock does look cheap. The quality of the institution is toward the higher end of the spectrum and management continues to grow where growth matters most. To be clear, I would argue that the easy money has already been made by this point. But given the numbers that we are looking at, I would say that some additional upside is probably on the table. Because of that, I have decided to rate the business a very soft ‘buy’ at this time.