Wilmington Trust Outlook Bleak

Wilmington Trust (WL) had 3Q08 net income for the quarter that was down 50.4% year-over-year due to $19.7 million loss on the preferred stocks of the two GSEs (Fannie Mae (FNM) and Freddie Mac (FRE)).

Wilmington Trust currently trades at 12.6 times the consensus forward estimate, at 5% premium to the peer group median. On a price-to-book basis, the shares trade at 35% premium to the peer median, versus a 29% premium earlier. Relative pricing continues to look attractive on a P/E-to-growth (PEG) basis. Wilmington  Trust’s PEG ratio is now 1.58, a 39% discount to the 2.59 median for the peer group.

On a price-to-book basis, the 1.73% premium also looks attractive, given a ROE of 54% above median. We however, remain concerned with Wilmington Trust’s exposure to commercial real estate-construction loans. Though Wilmington  Trust lends mainly to smaller homebuilders in the Delaware Valley (61% of the portfolio) and not to national homebuilders, we expect further deterioration in the credit quality on account of ongoing weakness in sales.

Further, while the margin expanded during the current quarter as the market interest rates remained stable, we expect some compression as a result of the 50 bps rate cut in October. After reviewing the results, we are slightly increasing our FY08 and FY09 estimates to $2.20 per share and $2.40 per share respectively from $2.09 per share and $2.39 per share.

Our new six-month target price of $25.00 per share equates 1.54 times our projected book value of $16.25 per share as on March 31, 2009, or 10.9 times our EPS estimate for FY 2008. Along with $1.38 per share annual dividend, the target price implies a negative return of about 6.4% over the six-month horizon. Thus, we are maintaining our Sell recommendation on the shares.

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