WaFd Bank's Q4 2025 Earnings Outlook: Navigating Credit Risks, Margin Compression, and Strategic Loan Shifts

WaFd Bank (WAFD) faces a pivotal earnings season in Q4 2025, as it balances deteriorating credit quality, margin compression, and a recalibrated loan strategy in a persistently high-rate environment. Investors must weigh these dynamics to assess the bank's resilience and long-term profitability.

Asset Quality: Rising Credit Risks Amid Proactive Management

WaFd's credit metrics have shown signs of strain. By Q3 2025, substandard loans surged to 3.52% of net loans, nearly double the 1.84% recorded in the prior year, while criticized loans climbed to 4.07% from 3.01%, according to a SignalBloom analysis. Non-performing assets (NPA) also rose to 0.36% of total assets, up from 0.24% in Q3 2024, the same analysis noted. These trends suggest growing pressure on the loan portfolio, particularly in commercial real estate and multi-family residential segments, where substandard loans totaled $187.9 million and $156.7 million, respectively, according to SignalBloom's findings.

However, the bank has avoided provisioning for loan losses in Q4 2025, WaFd's press release said, a decision that reflects confidence in its underwriting standards and proactive risk management. This contrasts with Q4 2023, when WaFd recorded its first material net charge-off in a decade, according to the Q4 2023 report. While the absence of provisions may temporarily bolster earnings, the rising substandard loan ratios signal potential future provisioning needs if credit conditions worsen.

Net Interest Margin (NIM): Compression and Strategic Adaptation

WaFd's NIM has contracted sharply, falling to 2.39% in Q4 2025 from 2.62% in Q3 2025 and 2.73% in Q4 2024, the company reported. This decline stems from the Federal Reserve's rate cuts in late 2024, which accelerated the repricing of variable-rate assets while liabilities lagged, squeezing margins. Net interest income (NII) dropped to $155 million in Q4 2025, down from $173 million in the prior-year period.

The bank's strategic exit from the single-family mortgage lending market, expected to save $17 million annually by 2025, aims to stabilize margins. Instead, WaFd is focusing on commercial real estate and commercial & industrial (C&I) lending, which accounted for 73% of originations in Q2 2025, according to a Yahoo Finance article. Analysts project NIM will stabilize at around 2.39% in Q4 2025, with NII hovering near $172 million, though margin recovery remains contingent on the pace of rate normalization and the bank's ability to retain higher-yielding commercial loans.

Loan Growth: Strategic Shifts in a High-Rate Environment

WaFd's loan growth trajectory has been mixed. While the bank reported a 19.7% year-over-year increase in loans receivable in Q4 2024, according to a Market Inference report, Q2 2025 saw slower originations due to elevated rates. By June 2025, total loans held for investment (HFI) reached $20.3 billion, with commercial and industrial loans now comprising 59% of the portfolio (up from 26% in 2014), that report noted. This shift reflects a deliberate pivot toward business banking, which offers higher margins and aligns with the bank's cost-cutting initiatives.

Despite strategic adjustments, net loan growth has slowed as repayments outpace new originations. The bank has intentionally curtailed new loan production to manage risk, with commercial loans accounting for 68% of Q4 2025 originations, WaFd reported. A compound annual growth rate (CAGR) of 3.1% in net loans by 2026 was suggested by one analysis, suggesting cautious optimism, but investors should monitor whether rate sensitivity dampens demand for commercial lending.

Conclusion: Balancing Risks and Opportunities

WaFd's Q4 2025 earnings outlook hinges on its ability to navigate a fragile credit environment while adapting to margin compression. The bank's proactive exit from low-margin mortgage lending and focus on commercial sectors offer long-term benefits, but rising substandard loans and NIM contraction pose near-term risks. Investors should watch for signs of provisioning acceleration and the effectiveness of cost-saving measures in offsetting margin declines.

As the Federal Reserve's rate trajectory remains uncertain, WaFd's strategic agility will be critical. For now, the bank's earnings resilience-bolstered by disciplined credit risk management and a refocused loan strategy-suggests a cautiously optimistic outlook, albeit with elevated volatility. Historically, when WAFD has exceeded earnings expectations, the stock has delivered an average cumulative excess return of approximately +1% over 30 days, with a win rate of 45–50%, according to a backtest. However, these returns were not statistically significant, indicating limited systematic alpha from such events.