As the liquidity crisis situation that rattled the banking industry and took down SVB Financial's Silicon Valley Bank (SVB) fades into the rearview mirror, some of the stocks that were negatively affected by the crisis deserve a fresh look. Some of them sold off simply because they had exposure to the tech sector and contained uninsured deposits.
One of these stocks is Western Alliance (WAL -1.25%). With fears subsiding, it looks like this regional bank should have further upside as investors separate fear from reality.
Image source: Getty Images.
Not all regional banks are the same
Western Alliance was one of the regional banks that were hit hard by deposit outflows during the SVB situation. In retrospect, the parallel between the two banks was weak, at best. Western Alliance did see some deposit outflows, but they stabilized quickly and began rising soon thereafter. As you can see in the chart below, the stock was hit hard by the fallout from SVB.
The reason for the connection was Western Alliance's Bridge Bank, which had a similar business model to SVB. Bridge is based in Silicon Valley and provides corporate banking services targeted toward life sciences and technology and innovation companies. It also serves the venture-capital and private-equity communities and provides business escrow services.
That description sounds a lot like Silicon Valley Bank but there's a big difference: Bridge Bank accounts for about 16% of Western Alliance's business. Those types of accounts were SVB's entire business.
On the earnings conference call, Western Alliance CEO Ken Vecchione talked about the fallout:
So, during the panic of Monday morning the 13th [of March], I think people looked and said, what most looks like SVB. Well, here is Western Alliance. Now, what was interesting, only 14% of our deposits and about 11% of our total loans was in the tech and innovation sector, right?
The market basically assumed the worst-case scenario, and depositors moved their funds to other banks. The uninsured deposits were the biggest flight risk, and many big companies moved their funds out of Western Alliance and put them in larger institutions like JP Morgan Chase.
Western Alliance is more than a tech bank
Western Alliance is much more than just a tech bank. If you look at its loan portfolio, about 40% is in commercial and industrial loans and 31% is in residential real estate. Western Alliance is a big mortgage originator and owns Amerihome, one of the top mortgage correspondent lenders.
Amerihome will benefit from Wells Fargo's exit from correspondent lending as it will reduce competition in the space. Amerihome is the second largest correspondent lender behind PennyMac Financial Services.
Western Alliance also provides warehousing lending and credit lines to mortgage servicers. Warehouse lending is a short-term loan secured by a loan that will be sold into the market or securitized. The vast majority of these loans are guaranteed by the U.S. government. While mortgage banking has been a tough business over the past two years, warehouse lending is a pretty low-risk business.
Western Alliance reported first-quarter earnings recently. It took a charge to write down some investments and gave an update on its deposits. During the first quarter, deposits fell from $53.6 billion to $47.6 billion. It reported that it had received deposits of $2.9 billion in the first half of April. The company's liquidity exceeds uninsured deposits by 58%.
Western Alliance is trading extremely cheap
Western Alliance is expected to earn $8.24 per share this year, which gives the company a price-to-earnings ratio of 4.9 times, which is pretty cheap. Tangible book value per share increased during the quarter, rising from $40.25 at the end of 2022 to $41.56, so the company is trading at a discount to book value per share. Historically, Western Alliance has traded at a premium to book value:
WAL Price to Book Value data by YCharts.
Finally, Western Alliance has a dividend yield of 3.6%, which is attractive for a bank. The annual per-share dividend of $1.44 is easily covered by expected 2023 earnings per share.
Western Alliance is still historically cheap and was tarred unfairly by the Silicon Valley Bank situation. The crisis appears to have abated, making this stock a buying opportunity.
