TFS Financial Stock: Slow but Strong (NASDAQ:TFSL)

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TSF Financial Corporation (NASDAQ: TFSL) stagnates as inflationary pressures intensify. This is why investors are still hammered by the continued decline in the share price. He needs to be more careful with liquidity because it seems be sensitive to changes in interest rates. Even so, it remains profitable to support its operations and cover dividends. Additionally, investors may have more attractive dividends as the company focuses on them.

Business Performance

Banks are subject to higher risks in the context of economic downturns and disruptions. TFS Financial Corporation is no exception as its growth remains hampered. This makes sense as the company seems to be interest rate sensitive. While the interest rate remains close to zero, interest income remains below normal. At $93.46 million, TFSL is down 4% year-over-year. Nonetheless, he keeps his deposits and borrowings manageable to support his operations. At $30.72 million, interest expense is 24% lower than 2Q 2022. This is a testament to the company’s efficient asset management. Also, it must be understood that the quality of its assets remains solid. This shows in his investments and securities, as the combined interest income is higher today. Thus, its net interest income remains higher with or without provisions.

Financial interest income and interest expense of TFS

Interest income and interest expense (MarketWatch)

Meanwhile, its non-interest income is much lower than in the comparative quarter. The decrease is most evident in the sale of loans. We can confirm this in the balance sheet because the share of the loan portfolio that it sells is lower. That’s why its total loans are now 4% higher. Non-interest expenses are higher as prices continue to rise. Its SG&A and office equipment expenses are higher. The decrease in its non-interest related transactions has a partial offsetting effect. Thus, the company’s operating margin plunged from 0.30 to 0.20. Even so, it’s a good thing the company remains profitable amid the massive changes. Its non-core activities are stable, so the net profit remains a positive value. Its difference with previous quarters remains reasonable. The values ​​are also more impressive than in 1Q 2022, showing its rebound.

TFS financial operating margin

Operating margin (MarketWatch)

In the second half, I expect a better performance despite inflation. Asset quality, particularly investment securities and loans, could be the driving force behind its rebound. Moreover, the deposits are increasing, which shows a greater demand for its services. These can pay off as TFSL seems to have an obvious sensitivity to changes in interest rates. Higher interest can attract more savings and investments.

Macroeconomic pressures

The company’s efficient asset management and strong capital base are evident. But, he needs to keep a closer eye on his liquidity position. We should also be wary of inflation, given that it has already exceeded our expectations. The general price level is on the rise and the momentum remains strong. Since March, the inflation rate has been above 8%. And more recently, it reached 8.6%, the highest in four decades. In my previous articles, I estimated it to reach 8.8% this year. But to be more conservative, I increase it to 9.6%.

In response, interest rate hikes by the Fed could become larger than expected. From the initial target of 0.75-1%, it rose to 3.00-3.25%. It is even higher today at 3.25-3.50%. Similarly, mortgage rates can reach 4.80-5.50%. This is why it must ensure more changes to better manage its loans and deposits. Fortunately, it maintains stable operations, as shown by its sustained viability amid the disruptions.

TFS Financial - Inflation Rates, Interest Rates and Mortgage Rates

Inflation rate, interest rate and mortgage rate (author’s estimate, CNBC, Barron’s and Forbes)

Also, many people earn a higher minimum wage of $27.33. The unemployment rate in the United States remains stable at 3.6%. Thus, many people may become more able to save, invest, and pay to borrow. Many recent polls show that 43% of Americans want to save more this year. With more finances, the frequency of defaults is lower. TFSL can even cater to more banked and unbanked customers.

Why TFS Financial Corporation still needs to be cautious

TFS Financial Corporation continues to prove its stability and resilience. The fact that it remains profitable despite macroeconomic pressures is a plus. Even better, the quality of the assets is solid since the investments generate higher incomes. However, it must monitor its liquidity position.

For example, its loans and deposits are high, which generates more income. But the loan-to-deposit ratio is over 100%. This shows that the amount the company lends is far greater than its deposits. This can be a wise move since it can generate more interest income. Its sensitivity to interest rate changes could give it an advantage in the second half. This may be why the amount of loan portfolio he is selling is lower than in Q2 2021. No wonder he continues to capitalize on cautious lending and investing. Despite all the promising growth prospects, it must be more conservative today. Economic uncertainty remains evident, which may affect its performance. He may not have enough reserves for defaults, although he can sell more loans if he wants. This could give him more non-interest income from the sale of loans. But, I understand that it can make interest rates rise and the possibility of earning more income.

TFS Financial - Loans, Deposits and Loan to Deposit Ratio

Loans, deposits and loan-to-deposit ratio (MarketWatch)

Its cash and cash equivalents are well below its borrowings. At $980 million in cash and cash equivalents, it is 25% lower than Q1 2021. The value is also lower relative to borrowings. Its percentage of loans is only 28% against 39% the previous year. Moreover, it is only 6% of the total assets. The advantage is that the quality of its investments and securities remains solid. This can be seen in its interest income on investment securities and its dividend income. In addition, cash levels are stable given the maintenance of profitability and cash inflows. Its ROA and ROE TTM remained almost the same in the comparative quarter at 0.46% and 3.8%. But of course, it remains below the ideal level, given its current size and capitalization.

TSF Financial - Cash and cash equivalents and borrowings

Cash and cash equivalents and borrowings (MarketWatch)

TFS Financial - Return on Assets and Return on Equity

Return on Assets and Return on Equity (MarketWatch)

Stock price valuation

TFS Financial Corporation’s stock price has been on a steady decline over the past year. At $13.66, it’s already been discounted by 24% from the starting price. But, it does not seem to be cheap according to its PE and PS ratio. If we exclude MHC shares, the PE ratio decreases.

Meanwhile, TFSL appears to be an excellent dividend stock with an 8.1% dividend yield. It is well above the average dividend yield of NASDAQ-listed companies and the S&P 400. What’s nice about the company is that it hasn’t cut dividends despite market uncertainties. Its dividend payouts are in line with an average growth of 24% in recent years. But analysts and investors are worried, given the high dividend payout rate. The cumulative value of EPS in the first half is $0.12 while dividends per share are $0.5650. This leads to a high payout ratio of 4.72. But, it should be noted that more than 80% of the shares belong to MHC. We can say that only 20% is the actual common stock outstanding. If we use it instead of reported WAV, EPS 1Q and 2Q will be $0.58. Therefore, the dividend payout ratio will decrease to 0.96. It shows that the company still has sufficient resources to sustain its dividends. We can estimate the price using the DCF model and the dividend discount model.

TFS Financial Dividend Yield

Dividend yield (Yahoo Finance)

FCFF

Cash

Loans in progress

$73,240,000

$24,400,000

$870,000,000

Perpetual growth rate

WACC

4.80%

9.00%

Common shares outstanding excluding MHC

53,639,000

share price

$13.66

Derived value

$18.37

share price

$13.66

Average dividend growth

0.2397540107

Estimated dividends per share

$1.13

share price

$13.66

Derived value

$17.29036443 or $17.29

Both models show potential undervaluation of the stock price. There can be a potential upside of 20-26% in 12-24 months. There may be an increase, which may be reasonable given the growth prospects.

Conclusion

TFS Financial Corporation did not show strong performance in a stormy market. She needs to be careful, especially with her current liquidity position. Despite this, its effective asset management and solid asset quality remain evident. No wonder he remains bold with his loans and deposits. In addition, it is sensitive to changes in interest rates. This factor could become its advantage as interest rate hikes continue. Its share price appears undervalued, which makes it a good entry point. The recommendation, for now, is that TFS Financial Corporation is a buy.

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