Northwest Bancshares’ (NASDAQ: NWBI) recent Q1 2024 earnings report has raised concerns regarding its profitability and dividend sustainability. Despite a modest 18.74% increase in total interest income compared to Q1 2023, the bank’s interest expenses surged by a significant 153.60%, leading to a decline in net interest income. This trend has persisted over the past year, with the speed of decline increasing in Q1 2024. The increase in interest expenses is primarily attributed to the rising cost of deposits, as customers shift towards time deposits with higher average costs. While the bank has seen growth in average loans receivable and average deposits, its loan-to-deposit ratio remains high at 95%, indicating limited room for further loan growth to offset the rising cost of deposits.
To address profitability concerns, management has initiated a strategic move to sell underperforming securities at a loss. These securities, with an average yield of less than 2% and a remaining maturity of over four years, will be replaced with higher-yielding securities. The proceeds from the sale will also be used to reduce debt. While this maneuver is intended to enhance future profitability, it will result in realized losses in the income statement, likely amounting to $30 million after taxes.
Adding to the bank’s challenges are unrealized losses on fixed-rate securities, which have reached $204 million for AFS securities and $120 million for HTM securities as of the end of March 2024. The recent increase in the 10-year T-Bond yield is likely to further exacerbate these unrealized losses in Q2 2024.
Despite the dividend yield of almost 7%, the bank’s payout ratio is higher than the industry median, and its growth rate has been low over the past 10 years. While the dividend is considered sustainable for now, its long-term sustainability is questionable, especially if earnings continue to decline in the current macroeconomic environment.
Given the persistent decline in profitability, combined with the potential for higher interest rates for a prolonged period, the previous ‘hold’ rating for NWBI has been revised to ‘sell’.
