SBNYP - Western Alliance Bancorporation: Is My Money Safe?

2023-03-13 18:59:05 ET

Summary

• In flashbacks to 2008, we have seen major banks collapse and be taken over.
• Bank stocks are being crushed.
• The FDIC only insures deposits up to $250,000, and that realization has led to a run on the banks as depositors seek to get money out.
• Western Alliance Bancorporation management released a filing to shore up confidence, but the stock is speculative and the bank may still be at risk.

Unless you have been living under a rock the last week, or have been wholly disconnected from media of all sources, then you know that the stock market has been shocked by a major fall in regional banks stocks. As you know, Silicon Valley Bank of SVB Financial Group ( SIVB ) was shut down by regulators after selling off investments and seeking funding. Then over the weekend, Signature Bank of New York ( SBNY ) was taken over in a shocking move by state regulators. The market had been selling the latter last week, but a lot of other regional bank stocks have been crushed. We learned that SBNY was shut down after a massive run on the bank led to $10 billion plus in outflows, jeopardizing its stability.

That takes us to another extremely volatile bank stock which has lost two-thirds of its value in a few market days. The bank in question is Western Alliance Bancorporation ( WAL ). The question of the day: "is my money safe?" Let us discuss.

Is my money safe with Western Alliance Bancorporation?

This is a question many have on their mind. If you are a customer and have deposits, they are safe up to the insured amount of $250,000. For the majority of Americans that is far more than enough. But what if you have more than $250,000 in the bank with WAL?

In this case the additional amount is considered uninsured. Many people had not talked about this issue until we saw SVB and then SBNY shutdown. So why is WAL stock down by two-thirds in just a few sessions? The reason is because Western Alliance bank has a large degree of uninsured deposits.

Well, in this case, we have a problem. According to SEC filings , we know that uninsured deposits are just over $31.1 billion. Folks, this is massive exposure. In fact, this is among the highest uninsured deposits as percentage of total deposits, coming in at 58%. The other concern is what crushed SVB, which was unrealized losses on available-for-sale investment securities. Well, as of Dec 31, 2022, this stood at $674.9 million. That number is likely higher with the massive moves in bond and equity markets the last two months, rest assured.

What if Western Alliance bank shuts down?

If Western Alliance Bancorporation shuts down, and you are depositor, once again, the FDIC will protect you up to $250,000. Anything beyond that and you will need the government to step in, or another bank, or even the Fed, to step in and make depositors whole. We have seen it with SVB, but this is unlikely to occur if more and more banks go down.

But what if you own the stock? If a bank gets taken over, and closed, and you are an equity holder, you will be wiped out. Today President Biden even confirmed that you will be wiped out.

That is right, if you are an investor in the bank you "took the risk" and knew "the risk." There will be no help for you if a bank shuts down and you own the stock. This has led to investors selling shares just in case, to prevent being left with nothing. On the flip side, it could be one of the best buying opportunities of a lifetime in some of these banks, but it is a bit of a dice roll until things calm down.

Is there a run on Western Alliance Bancorporation?

So you are likely wondering if depositors have made a run on Western Alliance Bancorporation like we saw with others. The answer is yes, there has been a run on the bank. But today management put out a new 8-K to provide color on the health of the bank. When it comes to these banks, the balance sheet matters a lot.

In our opinion, before the macro risk that popped up over the last week, the Western Alliance Bancorporation balance sheet appeared strong. The valuation of the stock was pretty attractive. But if customers are rushing to pull money out, it is just hard to survive. That is a fact. But the health of the bank, according to the filing, is better than expected, but it has done little to reverse the stock. However there are growing cash reserves here. Western Alliance Bank President and CEO Kenneth Vecchione stated:

“Since the statement we released last week, Western Alliance has taken additional steps to strengthen its liquidity position to ensure that we are in a position to meet all of our client funding needs, including increasing our borrowing capacity. As of this morning, cash reserves exceed $25 billion and are growing, while deposit outflows have been moderate. Including accounts eligible for pass-through insurance, insured deposits exceed 50% of total deposits.”

The latter statement includes the pass-through insurance, though the real amount is over 58%, per Reuters . But management acknowledged that outflows have been moderate, though a number was not assigned. That is concerning.

Now, here is the key. Within the 8-K, we also learned what would happen if the bank sold all of its securities held for sale for a big loss. The bank indicated that although there have been no sales of securities to date, if we assumed they did sell them all tomorrow, if adjusted to reflect unrealized losses, their CET1 capital ratio as of 12/31/22 would be approximately 7.9%. That is actually quite safe in our estimation.

Looking ahead for Western Alliance Bancorporation

Make no mistake, there is a ton of risk here. People are likely going to continue to pull money out of banks. So what are the safest banks in the U.S.? Well, it is not Western Alliance. But in our opinion it is the biggest and strongest international banks (the majors) as well as very conservative smaller regional banks that have strict lending requirements and grow slowly.

It seems to be the mid-tier size banks that are the most risky, as well as those that have anything to do with venture capital, crypto, and those with high uninsured deposits. Never before have we ever really looked at "uninsured" deposit levels. It just was not a thing, but is very 2008-like. Investing here in this stock could be one of the best generational buys long term, but the market is pricing in a huge failure here. It is very risky.

We believe more and more withdrawals will pick up as fear builds on social media and these bank issues dominate the headlines. Is Western Alliance in trouble? It may be. Should you take money out of Western Alliance bank? It may be a safe idea to pull out some to ensure you are insured, as you cannot rely on the government backstopping you. If you are an equity investor and they get shut down, you will be wiped out. On the flip side, the balance sheet seems healthy, cash reserves are strong. And if management sells off all securities at a loss, they are still well-capitalized, comparatively. Western Alliance Bancorporation could make for a speculative buy, but keep any position small.

Your voice matters

What would you like to add? Earnings have been strong. Loans and deposits were healthy before this macro risk. Will there be a run on this bank further? Do you think it's safe? Are you trading this? Let the community know below.

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