Given the current market recovery factor and valued growth indicators, we are upgrading our recommendation on the shares of Wilmington Trust Corporation (WL) to Neutral from Underperform. Although the current economic turmoil has weakened both the revenue growth and the operating leverage of Wilmington, we believe that once the economy stabilizes, it will have a substantial positive effect on the earning potential of the company.
Wilmington reported a fourth quarter loss, versus the Zacks Consensus Estimate of earnings. Results reflected a strong growth in Corporate Client Services segment, improvement in core deposits and growing assets under management (AUM) and assets under administration (AUA). However, these were offset by an increase in non-performing loans and a decline in investment portfolio.
Despite challenging conditions, Wilmington maintains a reputable capital position. At the end of 2009, the company’s capital ratios increased the most since 2005. While total risk-based capital ratio increased to 14.31%, tier 1 risk-based capital ratio increased to 9.86% and tier 1 leverage capital ratio increased to 10.10%, each exceeding the regulatory requirements of 10%, 6%, and 5%, respectively, for classification as a well capitalized institution established by the U.S. banking regulators. Besides, the substantial debt reduction also mitigates balance sheet risk in future.
Moreover, equity market levels impact the value of client assets in both AUM and AUA. This in turn impacts the fees that are earned for those services provided to clients. The turnaround in the equity markets is expected to have a beneficial effect on Wilmington’s AUM and AUA in the upcoming quarters.
However, credit metrics such as non-accrual loans, non-performing assets and net charge-offs have increased over the prior year levels. Wilmington’s provision for credit losses has also increased for the past four years, a trend that is expected to remain in place over the upcoming quarters given the continued economic weakness. Further, declining credit quality and margins have led to two quarterly dividend reductions, in January and July 2009, along with a reduced market price and book value per share at the end of 2009. The slow pace of growth has also been delaying the company’s exit from the government’s Capital Purchase Program.
Given the favorable dimensions of the current global economic recovery, Wilmington is expected to utilize the opportunities to enhance its growth model once again. The company’s improving core deposits, AUM and AUA, strategic acquisitions along with a modest balance sheet are expected to be the growth drivers.
However, poor credit quality, upheavals related to its real estate lending concentration and negative rating outlook deter market liquidity and operating leverage. Wilmington has been severely marred by reduced client activity and increased credit and other cost of operations. Overall, we believe the company is capable of developing a hyper-strategic and functional approach to keep pace with its peer group.
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