010. Analyzing Western Alliance Bancorp: Impressive Deposit Growth and Short-Term Stability, but Long-Term Concerns Loom
Episode Transcript:
In the realm of US banks, Western Alliance Bancorp has caught our attention with its recent performance. Concerns about the stability of banks have subsided as most institutions witness a positive trend in deposit levels. Notably, Western Alliance has experienced a remarkable rebound, with its stock surging by over 60% since hitting a low point in May. This resurgence can be attributed to the bank's impressive deposit growth, which has surpassed expectations, with over $2 billion added this quarter. As a result, Western Alliance has significantly reduced its exposure to a potential "bank run."
However, when evaluating the situation of "challenged" regional banks, it's important to consider both short-term prospects and long-term potential. One may wonder how Western Alliance managed to grow its deposit base so rapidly while its peers faced declining deposits. Market conditions cannot take credit for this feat, as the M2 money supply level, a crucial driver of deposits, has actually deteriorated since May. Instead, Western Alliance has expanded its savings account program, offering an Annual Percentage Yield of over 5%, making it one of the most attractive accounts on the market today. This move has resulted in significant growth in depositor accounts, particularly among smaller, more-insured accounts held by middle-income households.
While this change has enhanced Western Alliance's immediate liquidity position, it comes at the cost of decreased potential income. It's worth noting that the bank's assets remain predominantly focused on real estate loans. This concentration poses risks, including a potential increase in loan losses and a decline in net interest margins, which could negatively impact the bank's cash flow. Although the immediate risk of a "bank run" is low, these secondary risk factors could eventually undermine the bank's solvency.
Delving into the numbers, Western Alliance reported $71 billion in assets and $65.5 billion in liabilities at the end of quarter one. Their total loan portfolio amounted to $54 billion, with a significant portion allocated to real estate loans. With a loan-to-deposit ratio of approximately 95% and a Common Equity Tier 1 ratio of 9.4%, Western Alliance appears to have a higher exposure to real estate loans, which carry higher risk weighting. Additionally, the bank has incurred off-balance-sheet losses from investment securities, amounting to around $790 million as of quarter one, attributed to the decline in the bond market.
Considering these factors, if Western Alliance were to liquidate all its securities and loans in the current market, its net equity would likely fall short of its tangible book value. The bank faces a known unrealized loss of approximately $790 million on securities alone. There is also a potential unrealized loss of over $2 billion on its residential mortgage loans. Taking these figures into account, it seems that the bank's net liquidation value is likely below $2 billion, making it challenging to view this as a significant value opportunity. Western Alliance is currently trading at a premium to its tangible book value, without fully accounting for these unrealized losses.
Looking ahead, Western Alliance's earnings outlook raises concerns as well. The bank's net interest margins are expected to be impacted by increased depositor costs. The majority of the bank's liabilities consist of interest-bearing savings accounts, and the recent offering of over 5% Annual Percentage Yield has attracted depositors. However, this increase in depositor costs, combined with relatively stagnant asset yields, may lead to a decline of 2% or more in the bank's net interest margin by the end of the period, eroding a significant portion of interest income. We will have to wait for the quarter 2 and quarter 3 earnings reports to confirm these projections.
While Western Alliance Bancorp has showcased remarkable deposit growth and regained stability in the short term, there are concerns about its long-term prospects. The heavy concentration in real estate loans and the potential impact on net interest margins could pose challenges for the bank's financial health. Additionally, the unrealized losses on securities and residential mortgage loans cast a shadow on its net equity and tangible book value. These factors should be carefully considered by investors before making any decisions.
This is Tyler Cauble, signing off.
