Three months ago, WaFd looked like a turnaround that had found its footing: loans were growing again, efficiency was improving, and the stock had re-rated well above tangible book value. Since then, the market has taken back much of that optimism. Shares have fallen 22% since the last report while the S&P 500 gained 5%, leaving the stock at $29.92, well below its 200-day moving average of $34.29 and only about 2% above its post-earnings low of $29.26. The fiscal fourth-quarter report on October 15 needs to show whether that selloff reflects real cracks in the story or simply a market that stopped giving the bank the benefit of the doubt.
On paper, the bar is modest. Analysts expect earnings of $0.83 a share, a little above the $0.81 reported last quarter and up 15.3% from $0.72 a year ago. The revenue consensus of $201.5 million implies a 41.6% year-over-year decline, but that figure sits far below recent reported totals of roughly $345 million to $356 million and probably reflects a difference in how revenue is measured rather than a collapse in the business. Earnings per share is the cleaner gauge. Management offered no formal numeric guidance, so the conference call is the best guide to what matters.
The bullish case rests on loan growth. After a year of contraction, the active portfolio grew at a 12% annualized pace in the March quarter and 10% in the June quarter, with commercial and industrial lending making up nearly half of originations. Management reaffirmed 8% to 12% forward growth, so another quarter in that range, alongside roughly $1.5 billion of originations, would support the thesis. The warning sign is the pipeline, which fell 9% to $2.9 billion, with corporate banking down 19%. If loan growth slows noticeably, the softer pipeline will look less like a pause and more like a peak.
Credit is the bigger swing factor and probably the main reason the stock has weakened. Criticized loans rose to 4.9% of net loans from 4.2%, provisions climbed to $11 million from $4 million, and a $54 million C&I relationship was downgraded to doubtful with a sale expected by September 30. No charge-off had been taken. This report should show whether that sale happened and at what loss. A clean exit near carrying value would ease a major worry, while a sizable charge-off, another jump in provisions, or new problem loans would suggest the trouble is spreading beyond one borrower.
The margin is the third issue. The bank used to describe a 3% net interest margin as an organic goal about two years away. Last quarter it said reaching that level now likely requires higher rates, because aggressive deposit competition has wiped out the repricing benefit. With the margin at 2.81% and guided flat, any slip would hurt, especially since the 53.7% efficiency ratio leaves less room for further cost savings. Partial offsets include the accreting rate mark on the Luther Burbank portfolio, about $6 million to $7 million a quarter, and a small gain from securities repositioning.
Sentiment has turned more negative, with the bearish reading deepening to 29.3% from 18.1% before the last report. That lowers the bar for a positive surprise, but it does not change what WaFd needs to prove. Investors will also want updates on the potential capital relief of about $300 million from the Basel III re-proposal and on management's renewed interest in acquisitions, both of which matter more if the stock is trading cheaply. In the end, the quarter turns on whether credit costs stay contained while loan growth holds. If both happen, the selloff will look overdone. If credit worsens as the pipeline fades, the turnaround story will need to be rewritten.