WAL - Western Alliance Bancorporation: Strong Growth On The Cards

• The loan book is unlikely to continue to grow at the second quarter's outstanding rate. However, the growth rate will continue to remain at a remarkably high level.
• Thanks to sticky deposit costs, the topline is moderately rate sensitive.
• Provisioning will likely trend higher mostly on the back of substantial loan additions.
• The December 2022 target price suggests a high upside from the current market price. However, WAL is offering a low dividend yield.

Earnings of Western Alliance Bancorporation ( WAL ) will most probably continue to surge in the next few quarters due to remarkable loan growth. Further, slight margin expansion will support revenues. On the other hand, higher provisioning will restrict earnings growth. Overall, I am expecting Western Alliance Bancorporation to report earnings of $10.0 per share for 2022, up 15% year-over-year. Compared to my last report on the company, I haven't changed my earnings estimate much. For 2023, I'm expecting earnings to grow by a further 17% to $11.7 per share. The year-end target price suggests a high upside from the current market price. Therefore, I'm maintaining a buy rating on Western Alliance Bancorporation.

Loan Growth Likely to Decelerate After a Phenomenal Second Quarter

Western Alliance Bancorporation reported outstanding loan growth of 18.2% in the second quarter of 2022, or 72.8% annualized. What is most impressive is the fact that this growth was mostly organic, with only a small part attributable to accounting measures. Western Alliance shifted $1.9 billion (4% of loans) from held-for-sale to held-for-investment loans. Within the organic loan growth, the commercial and industrial segment, C&I, was the biggest driver of loan growth.

The second quarter's loan growth can obviously not be sustained as it's an anomaly. Further, interest rates are likely to peak later this year before declining next year. Such an interest rate outlook will encourage borrowers to put off some of their less urgent borrowing plans until next year.

On the other hand, strong job markets will support loan growth. Western Alliance is a nationwide lender; therefore, the national unemployment rate is a suitable indicator of credit demand for the company. The job market is near full employment and at record lows, as shown below.

The management mentioned in the conference call that it expects loans and deposits to grow in excess of $2 billion per quarter. Part of the management’s confidence is attributable to robust loan pipelines.

Considering the factors given above and the management’s guidance, I'm expecting the loan book to increase by 36% in 2022. In my last report on Western Alliance, I estimated loan growth of 21% for this year. I've revised upwards my loan growth estimate for the year mostly because of the portfolio's phenomenal performance during the second quarter of 2022. For 2023, I'm expecting loan growth to return to a more normal level. Meanwhile, I'm expecting other balance sheet items to grow mostly in line with loans. The following table shows my balance sheet estimates.

In my last report on Western Alliance, I estimated earnings of $9.92 per share for 2022. I haven't changed my earnings estimate much because the upward revision in loan growth estimate cancels out the upward revisions of operating and provisioning expenses.

Actual earnings may differ materially from estimates because of the risks and uncertainties related to inflation, and consequently the timing and magnitude of interest rate hikes. Further, a stronger or longer-than-anticipated recession can increase the provisioning for expected loan losses beyond my estimates.

Maintaining a Buy Rating Due to a High Upside

Given the earnings outlook, I’m expecting Western Alliance to increase its dividend per share by $0.02 to $0.38 in the third quarter of 2023. The earnings and dividend estimates suggest a payout ratio of 13% for 2023, which is in line with the 2020-2021 average of 15%. The dividend expectation for 2023 implies a dividend yield of 1.9%.

I’m using the historical price-to-tangible book (“P/TB”) and price-to-earnings (“P/E”) multiples to value Western Alliance. The stock has traded at an average P/TB ratio of 2.05 in the past, as shown below.

The stock has traded at an average P/E ratio of around 10.7x in the past, as shown below.

Equally weighting the target prices from the two valuation methods gives a combined target price of $95.9, which implies a 24% upside from the current market price. Adding the forward dividend yield gives a total expected return of 26%. Hence, I’m maintaining a buy rating on Western Alliance Bancorporation.

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