Western Alliance Is Up Almost 80% This Year -- and It May Not Be Done

A combination of record-low interest rates and strong demand for homes with rising prices means burgeoning loan books for banks. Smaller regional banks grew markedly in 2020, and Western Alliance Bancorporation (WAL 3.05%) was among the best performers.

Since the pandemic lows in March last year, the stock has more than quadrupled, on account of significant loan and deposit growth for the full year 2020. The momentum flowed through to the first quarter of 2021, but it needs to continue in order to maintain the stock's current earnings multiple. So far, the signs are there.

Image source: Getty Images. 

Diversified holdings

Western Alliance runs a highly successful commercial division lending to small and mid-sized businesses and providing specialized banking services to niche industries. It makes up 75% of the company's $27 billion in gross loans, with consumer-related products like mortgages accounting for almost all the rest. 

In 2020, the commercial division grew more in dollar terms, but it was the consumer segment that grew the fastest (albeit from a lower base). 

Data source: Company filings. 

Deposits in the consumer segment grew 115% to $9.9 billion -- also significantly faster than the commercial segment, which was up 26% to $21.4 billion. 

The U.S. mortgage market hit a major milestone in 2020. Total outstanding mortgage debt reached $10 trillion -- surpassing the $9.9 trillion peak in 2008 before the financial crisis ravaged the economy. Record low interest rates on account of the pandemic have driven strong demand for houses this time around, triggering single-family home shortages and elevated prices. Higher prices mean consumers are borrowing more to purchase homes, which could be a source of accelerated growth for banks.

Western Alliance is leaning into the mortgage market strength with its recent acquisition of AmeriHome, the third-largest correspondent mortgage acquirer in the U.S. Through 700 partnerships with loan originators, the company purchased $65 billion in loans in 2020. AmeriHome isn't a one-trick-pony, though. It also lends directly to consumers and services the loans. Overall, it manages a $99 billion mortgage portfolio that adds a powerful edge to Western Alliance, with a 30% projected bump to earnings per share going forward. 

An earnings story

The company has grown full-year earnings materially over the last few years. Although 2020 wasn't a blowout in terms of growth compared to 2019, investors appear to be pricing in the potential benefits from the AmeriHome transaction. So far in 2021, Western Alliance shares are up almost 80%. 

Data source: Company filings. 

Over 65% of the full-year earnings for 2020 were realized in the second half, and that momentum carried into the first quarter of 2021. The company's 12-month trailing earnings of $6.12 are meaningfully higher than the 2020 result, signaling that perhaps 2021 will be a stronger year, especially given the potential 30% earnings boost expected from AmeriHome. 

Data source: Company filings. 

There is some cause for concern, though. At Thursday morning's prices around $106.50, the stock trades at a little over 17 times trailing-12-month earnings. This is significantly higher than the 11.8 multiple in 2019, based on full-year earnings, or the 9.5 multiple in 2018. 

However, the average 2021 earnings estimate by 12 analysts (consolidated by Yahoo! Finance) is $8.08 per share. This puts the stock at 13.2 times 2021 forecasted earnings, which is in line with the recent 13.5 times multiple of the SPDR S&P Regional Banking ETF based on 2021 forecasts. 

While investors are pricing in strong growth, it's clear that there is material upside if the company can deliver based on estimates. There will be a shift toward the consumer segment at Western Alliance, which was already fast-growing, as it incorporates Amerihome. As long as the housing market remains strong, the company should continue to reap the benefits and deliver for shareholders.