WaFd's Q4: A Beat on EPS, But the Market Was Priced for More

The market's reaction to WaFd's fourth-quarter report was a textbook lesson in expectation arbitrage. The stock fell 2.5% on the day, a clear signal that the reality of the print was worse than what had been priced in. Investors had bid up the shares on the belief that the bank's growth story was accelerating, but the numbers showed a more modest reality.

The beat on earnings per share was the headline, but it was overshadowed by misses on the core drivers of bank profitability. While EPS of $0.79 topped the consensus estimate of $0.76 by 4.6%, the revenue figure of $191.4 million came in 1% below the $193.3 million Wall Street was expecting. For a bank where net interest income makes up the vast majority of revenue, the miss on the top line was a critical red flag.

More telling was the performance of the net interest margin, the key metric for a bank's core lending profitability. WaFd's NIM of 2.7% missed estimates by 4 basis points. In a rising rate environment, investors price in the expectation that banks will see their spreads widen. A margin that fails to meet even modest expectations resets the growth narrative, suggesting the bank may be facing competitive pressure or a shift in its loan mix that is capping its earnings power.

This is the classic "sell the news" dynamic. The EPS beat was a relief, but it was not enough to offset the disappointment on revenue and margin. The whisper number for the quarter had likely baked in stronger top-line growth and a margin expansion. When those elements came in soft, the forward-looking view of the stock was reset lower. The market's verdict was clear: a beat on one line item wasn't enough to justify the premium already in the price.

Guidance Reset: The Real Catalyst for the Expectation Gap

The expectation gap wasn't just about last quarter's numbers; it was set by the forward view management provided. The real catalyst for the stock's decline was a guidance reset that moved the narrative from aggressive growth to a focus on quality and efficiency.

Management's plan for the coming year is a clear pivot. They guided for 8–12% growth in the active loan portfolio next year, a significant slowdown from the 103% surge in new originations seen last quarter. This isn't a minor deceleration; it's a strategic recalibration. The plan to replace ~$8.1 billion in single-family loan runoff with agency MBS signals a deliberate move away from credit risk. The goal is to pick up yield-estimated at about 100 basis points-without taking on the same level of loan loss exposure. In other words, the bank is choosing safety and stability over rapid balance sheet expansion.

This shift is part of the broader 'Build 2030' strategy, which targets 20% non-interest-bearing deposits by 2030 to reduce funding costs. It's a longer-term beat-and-raise scenario, but one that requires patience. The market, which had priced in continued high-growth momentum, now sees a path defined by operational discipline rather than top-line fireworks.

The guidance reset also highlights a tension between near-term credit monitoring and long-term profitability. While the bank is managing runoff, credit metrics weakened modestly in the quarter, with delinquencies and criticized loans ticking up. This adds a layer of near-term risk that the growth-focused narrative had likely downplayed. The new guidance acknowledges this by prioritizing portfolio quality and funding efficiency over pure volume.

Viewed another way, the market was expecting a continuation of the recent explosive growth trajectory. The reality, as laid out in the guidance, is a more measured, quality-driven approach. For a stock that had rallied on growth optimism, this reset was the real disappointment. The whisper number for the year ahead had likely baked in double-digit loan growth and margin expansion. The new plan, while prudent, suggests those expectations were too aggressive. The stock's reaction was a direct response to this expectation gap on the forward view.

Financial Health: Separating the Beat from the Reset

The EPS beat was supported by solid underlying financial discipline, a reminder that the stock's decline was about growth expectations, not fundamental weakness. The bank's cost control was particularly sharp, with the efficiency ratio improving to 55.3% for the quarter, beating estimates by 80 basis points. This shows management can deliver profitability even when top-line growth stumbles, a key strength in a volatile environment.

Credit quality remains stable, providing a solid foundation. The allowance for loan losses sits at 1.04% of gross loans, up slightly but within recent ranges. While there were modest upticks in delinquencies and criticized loans, the overall portfolio risk profile hasn't deteriorated sharply. This stability is crucial for a bank navigating a guidance reset; it means the bank isn't sacrificing quality for growth.

The capital position is robust, offering a clear cushion. Tangible book value per share grew 7.1% year-over-year to $29.91, providing a tangible net worth that supports both lending and shareholder returns. This growth, while decelerating from longer-term trends, is steady and aligns with the bank's focus on building a durable balance sheet.

The bottom line is that the financial health metrics tell a story of operational strength, separate from the growth narrative. The beat on EPS and the efficiency ratio demonstrate effective management, while the capital and credit metrics show resilience. The market's reaction was a bet on future growth acceleration, not a verdict on current financials. For now, the bank has the financial wherewithal to execute its new, more measured strategy.

Catalysts and What to Watch

The path forward hinges on a few key catalysts that will test whether the market's reset valuation is fair. The immediate event is the Q1 2026 earnings report, expected today, with the conference call scheduled for tomorrow. This call is critical. Management must justify the guidance reset by explaining the strength of the loan pipeline and demonstrating that the planned portfolio shift is not a sign of weakness but a strategic move to higher-quality yield. Any hint of a slowdown in new production or a deterioration in credit quality could quickly reopen the expectation gap.

Watch the tangible book value per share growth rate closely. The bank has shown steady growth, with tangible book value per share up 7.1% year-over-year. This metric is a tangible measure of shareholder equity and a key component of the long-term beat-and-raise thesis. A deceleration here would signal the strategy is not creating value as quickly as hoped. Conversely, a return to stronger growth would support the view that the new focus on efficiency and non-interest-bearing deposits is working.

The progress on the Build 2030 strategy is the broader narrative. The plan to accelerate the shift from thrift to commercial banking and target 20% non-interest-bearing deposits is a multi-year play. Investors need to see concrete steps, like the expansion of treasury solutions and the impact of SBA delegated authority, that demonstrate the bank is building a more profitable, diversified franchise. This is the foundation for the future margin expansion and ROTCE improvement that the market will eventually price in.

Finally, monitor the stock's reaction to the Q1 results. A beat on EPS, especially if accompanied by a stronger forward guide for loan growth or margin stability, could begin to close the expectation gap. The whisper number for this quarter had likely been reset lower after the Q4 print. A beat on that revised number would be a positive surprise. The market's verdict on the Q1 report will determine if the current valuation reflects the new, more cautious growth path or if further downside remains.