Wilmington Lowered to Underperform – Analyst Blog

Based on Wilmington Trust Corporation’s (WL) exposure to risky construction loans and its deteriorating credit quality, we have downgraded our long term recommendation on the shares of company to “Underperform” from “Neutral”.

 

Wilmington’s second quarter 2010 loss of $1.33 per share significantly lagged the Zacks Consensus Estimate of a loss of 30 cents. This also compares unfavorably with the prior quarter’s loss of 44 cents and the prior-year quarter’s loss of 20 cents.

 

Second quarter results were hurt primarily by higher loan loss provisions, increased non-interest expense and weakness in the commercial construction portfolio. However, strong growth in Corporate Client Services segment, improvement in core deposits and growing assets under management were among the positives.

 

Wilmington expects overdraft charges to be lower from the third quarter of 2010, due to the recent changes in the Federal Reserve’s Regulation E. Also, the Dodd-Frank Act and the Durbin amendment are expected to negatively impact the company’s interchange fee income. The Durbin amendment allows the Federal Reserve to set a maximum rate that the banks may charge for electronic debit card transactions.

 

Also, a significant weakness is being observed in the residential construction activity. Wilmington’s exposure to risky construction loans should lead to an increase in nonperforming assets over the next several quarters.

 

Further, the increase in Wilmington’s expense is marring its earnings growth creating pressure on operating margins.

 

Given the continued economic weakness, Wilmington’s credit quality has been deteriorating for the last few quarters. Further, as a result of a slow growth rate, the company has been not able to exit from the government’s Capital Purchase Program.

 

However, Wilmington continues to witness modest growth in core deposits and assets under management. The company’s capital position remains stable and strategic acquisitions are expected to drive further growth once the economy rebounds.

 

Wilmington shares currently retain a Zacks #5 Rank, which translates into a short-term ‘Strong Sell’ rating and indicates significant downward pressure on the shares.