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Here's Why Western Alliance Bancorp Stock Is Plunging Today

By Matthew Frankel, CFP® - Mar 9, 2020 at 10:46AM

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The financial sector is getting hammered, and the regional bank is getting hit especially hard.

What happened

The stock market is taking a beating on Monday, with the S&P 500 down by about 6% as of 11:25 a.m. EDT. The banking industry is doing even worse, with the Financial Select Sector ETF (XLF 3.69%) falling more than 8%. And regional lender Western Alliance Bancorp (WAL 5.23%) is getting hit especially hard, dropping nearly 15%.

So what

The primary way that most banks make money (including Western Alliance) is simple: They borrow money at relatively low interest rates and lend that money out at higher rates. When market interest rates rise, the spread between these two rises. And when rates fall, like they've done dramatically recently, bank margins get squeezed.

Businessman looking at financial chart with hands on head.

Image source: Getty Images.

Simply put, Western Alliance has a lot of profit to lose. Because of its highly profitable focus on niche lending, its average yield on its assets (loans) is 5.3% and its net interest margin in 2019 was 4.52%, well above its peer group average of 3.49%. And the bank pays very little interest on its deposit base (about 40% are noninterest bearing), so it doesn't have much room to make its cost of funds any cheaper.

More broadly, fears about the novel coronavirus and the plunge in crude oil prices are adding to investors' unease.

Now what

In a nutshell, if bank margins take a dive -- as it looks like they will -- Western Alliance could feel the squeeze more than most. It remains to be seen how long this ultra-low interest environment could last, but if it persists, it could be rough times ahead for bank stock investors.

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Stocks Mentioned

The Select Sector SPDR Trust - The Financial Select Sector SPDR Fund Stock Quote
The Select Sector SPDR Trust - The Financial Select Sector SPDR Fund
$32.34 (3.69%) $1.15
Western Alliance Bancorporation Stock Quote
Western Alliance Bancorporation
$74.45 (5.23%) $3.70

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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