8-K: WaFd, Inc. and Washington Federal Bank Receive First-Time Credit Ratings from KBRA

Kroll Bond Rating Agency (KBRA) has assigned initial credit ratings to WaFd, Inc. and its subsidiary, Washington Federal Bank, with a stable outlook for all long-term ratings.

Summary

• Kroll Bond Rating Agency (KBRA) has assigned first-time credit ratings to WaFd, Inc. and its bank subsidiary, Washington Federal Bank.
• WaFd, Inc. received a senior unsecured debt rating of BBB+, a subordinated debt rating of BBB, a preferred shares rating of BBB-, and a short-term debt rating of K2.
• Washington Federal Bank was assigned deposit and senior unsecured debt ratings of A-, a subordinated debt rating of BBB+, and short-term deposit and debt ratings of K2.
• The outlook for all long-term ratings is stable.
• The ratings are supported by WaFd's consistently favorable operating results, conservative credit culture, and strong asset quality.
• WaFd sold $2.8 billion of multifamily loans in 1Q24 and expects to sell $0.5 billion of residential mortgage loans in 3Q24.
• Despite these sales, the loan portfolio remains somewhat concentrated in residential mortgage and investor CRE, representing nearly two-thirds of the overall loan book.
• The company has ample on-balance sheet liquidity with $2.5 billion in cash, representing 9% of assets as of 2Q24.
• WaFd's deposit base is stable and granular, with uninsured/uncollateralized deposits at just 26% of total deposits.
• The company's core ROA was just under 0.9% for 2Q24.
• The CET1 ratio was 11.0% in 2Q24.
• Management expects NIM expansion for the remainder of 2024 from the benefits of the loan sales.

Sentiment

Score: 8

Explanation: The document is positive overall, highlighting the company's strong financial position, conservative risk management, and favorable credit ratings. While there are some risks and challenges mentioned, the overall tone is optimistic and confident.

Positives

• WaFd has a long history of consistently favorable operating results.
• The company has a high-quality and long-tenured management team.
• WaFd has a conservative credit culture, which has resulted in strong asset quality.
• The company's residential mortgage and multifamily portfolios have outperformed similarly sized peers.
• WaFd has a stable and granular deposit base.
• The company has ample on-balance sheet liquidity.
• WaFd has a positive AOCI position due to hedges implemented during the low-rate environment.
• The company's core operating expenses to average assets track well below peers.
• Profitability has remained solid, with a core ROA just under 0.9% for 2Q24.
• Capital ratios are considered adequate given the risk profile and ability to accrete internal capital.

Negatives

• The loan portfolio is somewhat concentrated in residential mortgage and investor CRE.
• The company's NIM generally tracks below peers due to its lower risk/lower yielding loan portfolio.
• The deposit composition is more concentrated in price-sensitive maturity deposits.
• WaFd has reflected a higher-beta throughout this interest rate cycle.
• Capital ratios have decreased considerably from stronger loan growth, share buybacks, and the LBC acquisition, though have bounced back in 2Q24.

Risks

• The company's loan portfolio is concentrated in residential mortgage and investor CRE, which could pose risks if these sectors experience downturns.
• The higher interest rate environment has put pressure on margins and earnings across the industry.
• The deposit base is concentrated in price-sensitive maturity deposits, which could lead to higher funding costs.
• There is potential for risk rating migration as credit quality normalizes post-pandemic.
• The company has exposure to the office sector, although it is well-contained at 4% of loans.

Future Outlook

Management expects NIM expansion for the remainder of 2024 from the benefits of the loan sales and anticipates deploying excess liquidity into loan growth.

Management Comments

• President and CEO, Brent Beardall, stated that he is pleased with KBRA's recognition of WaFd, Inc. and Washington Federal Bank's strong financial foundation and sound risk management practices.
• Brent Beardall believes the ratings affirm the trust and confidence that stakeholders place in the company.
• Management remains committed to maintaining financial strength and delivering value to all stakeholders.

Industry Context

The ratings come at a time when the banking industry is facing increased scrutiny due to interest rate volatility and concerns about asset quality, particularly in the commercial real estate sector. WaFd's ratings reflect its ability to navigate these challenges effectively.

Comparison to Industry Standards

• WaFd's residential mortgage and multifamily portfolios have outperformed similarly sized peers over a prolonged period.
• The company's NCO ratio has consistently tracked below the average of KBRA rated banks.
• WaFd's operating expenses relative to average assets ratio has steadily ranked in the bottom quartile versus similarly sized peers.
• The company's NIM generally tracks below peers due to its lower risk/lower yielding loan portfolio.
• WaFd's loan-to-deposit ratio has tracked modestly higher than peers historically.
• The company's investor CRE concentration is elevated compared to the rated peer average at 360% as of 2Q24.
• WaFd's capital ratios were previously above peers but have decreased due to loan growth, share buybacks, and the LBC acquisition.

Stakeholder Impact

• The positive credit ratings should increase investor confidence in WaFd, Inc.
• Customers can have increased confidence in the stability and security of Washington Federal Bank.
• Employees can be reassured by the company's strong financial position and positive outlook.
• The ratings may improve the company's access to capital and reduce borrowing costs.

Next Steps

• Management plans to deploy excess liquidity into loan growth.
• The company will continue to monitor and manage its loan portfolio, particularly in the residential mortgage and investor CRE sectors.
• Management will focus on growing core deposits and expanding its small business banking group.
• The company will continue to evaluate opportunities for strategic growth and acquisitions.

Key Dates

Keywords

credit ratings, KBRA, WaFd, Washington Federal Bank, debt rating, bank, financial institution, asset quality, loan portfolio, liquidity, NIM, capital, deposits, mortgage, CRE