WAL - Western Alliance: Why I Am Buying The Drop Again

2023-04-06 12:05:10 ET

Summary

• Western Alliance Bancorporation gave a liquidity and deposit update yesterday.
• The bank is seeing deposits flowing back. Net deposit outflows during the financial crisis were limited.
• Market overreacted yesterday (April 5) and the bank's discount to book value has widened again.

Shares of Western Alliance Bancorporation ( WAL ) slumped more than 12% yesterday on renewed fears about the U.S. financial sector and the bank's deposit situation. In an important update on Wednesday, April 5, the bank informed investors that its liquidity and deposit situation is under control, although Western Alliance Bancorporation did see net deposit outflows during the financial crisis in March. However, I believe the market completely overreacted to the bank's liquidity and deposit update. In my original investment presentation of Western Alliance Bancorporation two weeks ago I argued that market fear is likely exaggerated and that investors can take advantage of a sharp decline in the bank's price-to-book ratio. Since shares sold off again yesterday, I bought the drop yet again!

Liquidity and deposit update

Western Alliance Bancorporation gave investors an update about its liquidity and deposit situation yesterday. In the release, Western Alliance Bancorporation said that its total insured deposits accounted for 68% of deposits, saying that this percentage was "significantly higher" than at the end of FY 2022. As of March 16, 2023, Western Alliance Bancorporation's insured deposits accounted for more than 55% of all deposits, meaning the risk inherent in the bank's deposit base have declined lately. A higher percentage of insured deposits also makes incremental deposit withdrawals less likely.

Additionally, the bank said that it had available liquidity exceeding the amount of its uninsured deposits -- those deposits that are especially at risk of being withdrawn -- of 140%.

In a second update later on Wednesday, Western Alliance Bancorporation gave more specific information about its deposit outflows. The bank disclosed that it had a total of $47.6B in deposits at the end of the first-quarter compared to $53.6B at the end of FY 2022. This implies that total deposits declined by $6B, or a relatively modest decrease of about 11%. Western Alliance Bancorporation therefore did see deposit outflows, as expected, but they were not nearly as significant as some investors might have feared.

The bank also said that "since March 20, deposit balances stabilized and grew approximately $900 million to quarter end" and that deposits increased $1.2B since the end of the quarter through April 4, 2023. In other words, deposits are already flowing back to the regional bank as depositors trust the bank's liquidity situation and the Fed's liquidity guarantee. Clearly, the Fed's liquidity facility worked in March, otherwise Western Alliance Bancorporation would likely have seen more significant net deposit outflows in the first-quarter.

I believe that the deposit trend Western Alliance Bancorporation presented yesterday is solidly positive and that more deposits could return to the bank if the market regains confidence in the health and solidity of the U.S. regional banking system.

Western Alliance Bancorporation is going to report earnings for Q1'23 in April and the company already pre-disclosed its deposit balance. For the remainder of the year, the key task for the bank's management will be to rebuild its deposit base. Before the financial crisis, Western Alliance Bancorporation's deposit balance averaged approximately $53.75B and I believe WAL will eventually be able to return to this deposit level.

WAL's valuation

The bank's shares are once again available at a wider discount to book value and I am buying the drop because I believe the market is overreacting to the liquidity and deposit update. The market panic in March has created a new buying opportunity for shares of Western Alliance Bank Corporation, but yesterday's unreasonable sell-off has once again made the bank's shares cheaper.

Western Alliance Bancorporation is trading at a 36% discount to book value although the liquidity and deposit update was actually very good. The discount to book value is not as large as the one for First Republic Bank ( FRC ) or PacWest Bancorporation ( PACW ), but it is still very large and implies that investors with an appetite for risk are potentially getting a bargain here.

While other regional banks also sell at discounts to book value, I believe the risk profile is especially attractive here considering that the bank disclosed that deposits are already starting to flow back to the bank.

Risks with Western Alliance Bancorporation

If Western Alliance Bancorporation were to see new net deposit outflows all of a sudden, then investors may have a good reason to sell shares of the regional bank. However, since the deposit situation clearly has stabilized for Western Alliance Bancorporation and the percentage of insured deposits has risen lately, I believe overall (deposit flight) risks have decreased. However, if the situation in the U.S. regional banking market were to get worse, perhaps due to new bank closures, there is a risk that Western Alliance Bancorporation's discount to book value would get even bigger.

Final thoughts

There were a couple of important take-aways in Western Alliance Bancorporation's liquidity and deposit update yesterday. Deposit outflows have stabilized, deposits are flowing back to the bank, and the bank has more than enough liquidity to fund withdrawals. A key challenge for Western Alliance Bancorporation in FY 2023 will be to rebuild the bank's deposit base. But since the bank has stated that its deposit situation is improving, I believe the bank's recovery could be swift. The decline in WAL's deposit base was also relatively minor given the circumstance in the banking sector, and I believe shares of Western Alliance Bancorporation are too cheap to ignore!

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