WAL - Western Alliance Bancorp: A Beneficiary Of Improving Credit Conditions

2024-01-04 15:59:31 ET

Summary

• WAL experienced volatility due to the banking crisis in March 2023, but saw its shares soar in Q4.
• Total deposits grew by $3.2B or 6% q/q in 4Q, registering a cumulative net inflow of $6.7B since 1Q23.
• Net interest margin increased to 3.67% due to higher earning asset yields and lower average borrowings.
• The stock has appreciated due to a positive shift in investor sentiment amidst easing rates with more growth to follow in 2024.

Western Alliance Bancorporation ( WAL ) had volatile past year. What WAL experienced was similar to many other small regional banks due to the banking crisis in March 2023 led by the collapse of Silicon Valley Bank. The main culprit was a sudden surge in long-term US Treasury yields, which caused the banks' long duration assets to devalue considerably, triggering withdrawals en masse. However, as the long-term rates peaked in October 2023 at about ~5% for the 10-year which has come down significantly to just under 4%, bank shares found reprieve and jumped sharply in Q4.

Shrugging off deposit outflow fears

Total deposits grew $3.2B to $54.3B or 6% q/q which is slightly lower than in 3Q22 when deposits were at $55.6B. But, this figure is higher than $53.6B in 4Q22, right before the banking crisis unfolded. The bank ended 1Q23 with $47.6B in deposits. So, deposits in fact registered a $6.7B or 14% net inflow since then.

WAL was able to diversify its deposit base by growing its core commercial clients by $3.1B in 3Q23, primarily within Mortgage Warehouse, Regional divisions, and HOA. Its digital consumer channel efficiently increased granularity and helped diversify its commercial deposit customer base.

Insured and collateralized deposits are 82% of total deposits, with uninsured deposit liquidity coverage of 293%.

Uptick in net interest margin

Net interest income increased $36.7 million, mainly due to an expanded net interest margin, driven by higher earning asset yields and lower average borrowings. NIM rose to 3.67% from 3.42% a quarter ago.

Interest income was driven mainly by loan yields increasing 25bps due to a higher rate environment and floating-rate securities facilitating a 15bps increase in investment yields.

On the other hand, cost of interest-bearing deposits increased 41 bps, and total cost of funds decreased 5 bps to 2.80% due to an increase in savings and MMDA, higher non-interest bearing deposits, and lower borrowings.

The company is optimizing liability structure by using deposits to pay off short-term borrowings to lower the cost of funds.

Stable asset quality

Non-performing assets (non-performing loans + OREO) decreased $22 million to $245M or 35bps of total assets.

Provision for credit losses decreased $9.7M as modest improvement in economic forecasts.

The bank continues to far exceed required regulatory capital levels. The CET1 ratio has improved over the last year, rising 1.9pct to 10.6%. This was attributable to strong organic capital generation.

Verdict

Small regional banks should enter 2024 in a much more optimistic tone compared to the woes in the past year. Net interest income has reached an inflection point and credit losses should be well contained.

WAL is a growth-centric regional bank which has exhibited robust deposit base growth and NII expansion. Its solid capital position can allow it to proceed with share buybacks in 2024.

The stock trades at 1.3x book value with a forward ROE of about 15% and dividend yield of 2.3%. Thus, WAL is reasonably attractive still despite the recent outperformance as we enter in an easing rate cycle which will likely improve economic conditions.

For further details see: