Webster Financial has been treading water for the past six months, recording a small loss of 4.7% while holding steady at $51.56. The stock also fell short of the S&P 500’s 1.9% gain during that period.

Is there a buying opportunity in Webster Financial, or does it present a risk to your portfolio? Get the full breakdown from our expert analysts, it’s free.

Why Is Webster Financial Not Exciting?

We're swiping left on Webster Financial for now. Here are three reasons why we avoid WBS and a stock we'd rather own.

1. Revenue Growth Flatlining

We at StockStory place the most emphasis on long-term growth, but within financials, a stretched historical view may miss recent interest rate changes, market returns, and industry trends. Webster Financial’s recent performance shows its demand has slowed significantly as its revenue was flat over the last two years.

2. Efficiency Ratio Expected to Falter

Topline growth alone doesn't tell the complete story - the profitability of that growth shapes actual earnings impact. Banks track this dynamic through efficiency ratios, which compare non-interest expenses such as personnel, rent, IT, and marketing costs to total revenue streams.

Markets understand that a bank’s expense base depends on its revenue mix and what mostly drives share price performance is the change in this ratio, rather than its absolute value. It’s somewhat counterintuitive, but a lower efficiency ratio is better.

For the next 12 months, Wall Street expects Webster Financial to become less profitable as it anticipates an efficiency ratio of 48.5% compared to 45.8% over the past year.

3. High Interest Expenses Increase Risk

Leverage is core to the bank’s business model (loans funded by deposits) and to ensure their stability, regulators require certain levels of capital and liquidity, focusing on a bank’s Tier 1 capital ratio.

Tier 1 capital is the highest-quality capital that a bank holds, consisting primarily of common stock and retained earnings, but also physical gold. It serves as the primary cushion against losses and is the first line of defense in times of financial distress.

This capital is divided by risk-weighted assets to derive the Tier 1 capital ratio. Risk-weighted means that cash and US treasury securities are assigned little risk while unsecured consumer loans and equity investments get much higher risk weights, for example.

New regulation after the 2008 financial crisis requires that all banks must maintain a Tier 1 capital ratio greater than 4.5% On top of this, there are additional buffers based on scale, risk profile, and other regulatory classifications, so that at the end of the day, banks generally must maintain a 7-10% ratio at minimum.

Over the last two years, Webster Financial has averaged a Tier 1 capital ratio of 11.5%, which is considered unsafe in the event of a black swan or if macro or market conditions suddenly deteriorate. For this reason alone, we will be crossing it off our shopping list.

Final Judgment

Webster Financial isn’t a terrible business, but it doesn’t pass our bar. With its shares underperforming the market lately, the stock trades at 0.9× forward P/B (or $51.56 per share). While this valuation is reasonable, we don’t really see a big opportunity at the moment. We're fairly confident there are better stocks to buy right now. Let us point you toward a fast-growing restaurant franchise with an A+ ranch dressing sauce.

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