Regional banks as a group have been beaten down by pessimistic investors ever since mid-March, when Silicon Valley Bank imploded. Silicon Valley Bank was an unusual case in that it was not managing its interest rate risk properly and lost a lot of money on Treasuries and mortgage-backed securities it bought when interest rates were close to zero. Western Alliance (WAL 2.25%) was one of the regional banks that was lumped in with Silicon Valley Bank, but it is a much better-run business. Here's why it is different.
Western Alliance was caught up in the regional bank contagion
Western Alliance has been under pressure ever since the collapse of Silicon Valley Bank. The regional banks with tech industry exposure and large uninsured deposits were subjected to rapid deposit outflows. Since Western Alliance owns a tech bank called Bridge Bank, which provides banking services for tech and life science companies, it experienced deposit withdrawals and the stock was sold off hard.
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That said, Western Alliance is a much more diversified bank than some of the tech banks that ended up folding or merging. It refers to itself as "A Bank for All Seasons," with exposure to mortgage banking, commercial real estate, technology banking, and municipal banking. It is relatively geographically diversified.
Western Alliance has a huge footprint in the mortgage business. It owns Amerihome, which is one of the biggest correspondent mortgage lenders in the U.S. It also provides warehouse lines of credit to mortgage banks, which is a lucrative and relatively safe business.
Additionally, Western Alliance offers escrow account services to mortgage servicers. These accounts receive mortgage payments from borrowers and then forward the principal and interest payments onto the ultimate investors. These accounts also hold escrow payments for taxes and insurance. These accounts are sticky because switching from one bank to another requires a lot of administrative work and government approvals. Western Alliance bears no risk on these accounts and earns fee income on them.
Western Alliance has been transparent with investors
Western Alliance did see a decline in deposits in the aftermath of the Silicon Valley collapse, but they stabilized as of late March and have been increasing ever since. Most importantly, the percentage of insured deposits has been rising, which reduces the risk of deposit flight. Western Alliance has been repositioning its balance sheet, selling about $1.7 billion in loans and securities in the first quarter, with another $3 billion in sales contracted in Q2. Western Alliance reclassified some assets from held for investment to held for sale. This caused a $110 million charge, but it will strengthen the company going forward.
Western Alliance is cheap on an earnings and book basis
Western Alliance is expected to earn $8.22 this year, which gives the stock a price-to-earnings multiple of 4.6 times 2023 earnings per share. This is an extremely low valuation. The company pays a quarterly dividend of $0.36 per share, which works out to a dividend yield of 3.6%. Note that the annual dividend of $1.44 is amply covered by the projected earnings of $8.22 per share.
Finally, Western Alliance ended the first quarter with a tangible book value per share of $41.56, which was an increase of 3.2% compared to the end of 2022. Troubled banks generally don't report profits and growth in book value per share. At current levels, Western Alliance is trading at a significant discount to tangible book value of 0.82%, which is an attractive valuation as well.
Western Alliance has been proactive in keeping investors up to date on its deposit situation, and it has has been taking steps to improve its balance sheet. The bank has been subjected to guilt by association, which is probably unfair. Western Alliance is cheap on a book value and earnings basis, and its business model should sustain it.
