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3 Reasons Western Alliance Bancorporation Is the Best Bank to Invest in Today

By Morris Pearl - Apr 3, 2017 at 7:27AM

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Western Alliance Bancorporation is more profitable, is growing faster, and has more room to grow than its larger competitors.

Western Alliance Bancorporation (WAL -0.25%) has $17 billion in assets and is the 74th largest bank in the United States. It does not (yet) get much attention from Wall Street, so it can be an opportunity for regular investors.

It operates primarily in California, Nevada, and Arizona, and is a leader in multiple niche markets:

  • Public finance: This includes lending money to municipalities in anticipation of taxes which are due later in the year. Western Alliance has been picking up clients among towns and cities that don't want to deal with the big banks.
  • Hotel franchise finance: Many hotel chains consist of a company that owns the brand and businesspeople who license that brand and own and operate individual hotels. Western Alliance acquired a business from GE Capital of lending money to businesspeople who are running units of lower-priced hotels, such as Hampton by Hilton or Courtyard by Marriott. This requires loan specialists who understand the franchise model.
  • Homeowner association finance: Many Americans live in condominiums or planned communities, or in other arrangements where a group of homeowners have an interest in shared common property, such as lobbies or streets. Western Alliance has a specialty business of making loans to finance that common property.

The point of being in these businesses (and others) is that they involve complicated, custom deals that don't fit into cookie-cutter loans from the big banks. And Western Alliance has the added advantage of being small enough that there are few people between a businessperson who needs money and senior executives who can decide to approve a loan, thereby attracting businesses that value high-quality service.

Office of Alliance Bank

Image source: Western Alliance Bancorporation 2015 annual report.

The principal risk a bank faces is lending money out that isn't paid back. The good news is that Western Alliance has lower charge-offs than other banks.

Over the course of the last year, the bank charged off only 0.02% of its loans -- one-fifth the rate of similar banks (0.10%). The lower charge-off rate helps explain why Western Alliance has higher earnings as a percentage of its assets (1.61%) than other banks in its peer group (1.02%). That translates into a 14.7% return on equity versus 8.39% for its peer group.

Western Alliance has been growing faster than the overall banking industry, too. Over the last year, Western Alliance grew loans at over 18.5%; the banking industry as a whole has grown less than 3%. Western Alliance's profits are up by about 19% over the past year, while profits for the banking industry as a whole are up about 4%.

Western Alliance also has a higher net interest margin (4.58%) than its peer institutions (3.55%). That's akin to a manufacturing company selling its wares at a 29% higher price than its competitors can.

While Western Alliance is not particularly cheap -- it has been trading around 20 times earnings, and over 2.8 times book value -- its profitability and growth easily justify that valuation. The mean analyst expectation is for earnings to rise over 14% annually, and the last full year actually came in at more than 23% over the previous year.

Western Alliance is so much smaller than the giants of the industry that it has the capacity to continue the fast growth it has demonstrated over the past few years. That fast growth, together with its high profitability, will drive the stock price higher over the coming years.

Morris Pearl has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Marriott International. The Motley Fool owns shares of General Electric. The Motley Fool recommends Western Alliance Bancorp. The Motley Fool has a disclosure policy.

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