Treasury Management And Deposit Control Will Shape Lending Outcomes

Key Takeaways

• Increased loan growth in key sectors expected to drive net interest income and strengthen capital position for future lending opportunities.
  
• Emphasis on treasury management services and mortgage banking revenue to boost noninterest income and improve net interest margins.
  
• Pricing pressure, mortgage market volatility, and credit risk concerns could impact Western Alliance Bancorporation's income, asset quality, and overall revenue.

Catalysts

Operates as the bank holding company for Western Alliance Bank that provides various banking products and related services primarily in Arizona, California, and Nevada.

• Western Alliance Bancorporation expects to benefit from increased loan growth, particularly in sectors like national homebuilder finance, lender finance, and tech innovation, which should drive net interest income in the coming quarters.
  
• The company is putting a strong emphasis on improving its treasury management services, leading to an increase in service charges and fee income, which is anticipated to help boost noninterest income.
  
• By lowering deposit costs and actively managing interest-bearing deposit rates, the bank is poised for improved net interest margins, contributing positively to the net interest income trajectory.
  
• The anticipated growth in the mortgage banking revenue, despite rate volatility, is expected to support noninterest income, as mortgage production volume remains a key area of focus.
  
• The strengthening of its capital position with a focus on CET1 ratios above 11% supports the bank's strategic growth plans while positioning it well for future lending opportunities, likely impacting both earnings and capital adequacy positively.

Western Alliance Bancorporation Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Western Alliance Bancorporation's revenue will grow by 11.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from 26.1% today to 33.9% in 3 years time.
• Analysts expect earnings to reach $1.4 billion (and earnings per share of $11.54) by about April 2028, up from $796.6 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as $1.3 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 9.2x on those 2028 earnings, up from 8.9x today. This future PE is lower than the current PE for the US Banks industry at 10.7x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.09%, as per the Simply Wall St company report.

Western Alliance Bancorporation Future Earnings Per Share Growth

Risks

• The company has seen pricing pressure in the market, which may lead to a decline in loan yields, potentially impacting net interest income and margins.
  
• There is volatility in the mortgage market, and if mortgage rates do not fall below 6.25%, the company may not achieve the expected level of mortgage banking revenue, affecting noninterest income.
  
• The company's allowance for credit losses (ACL) is considered by some investors to be low, which may signal inadequate preparation for potential future losses, posing a risk to asset quality and earnings.
  
• The ongoing uncertainty in macroeconomic conditions, such as tariffs and potential interest rate cuts, could negatively impact client investment and business activity, thereby affecting loan growth and overall revenue.
  
• A significant portion of the office loan portfolio faces repricing or maturity risks amid changing market conditions, leading to potential increases in credit risk, and could affect asset quality.

Valuation

• The analysts have a consensus price target of $98.571 for Western Alliance Bancorporation based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $112.0, and the most bearish reporting a price target of just $80.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $4.2 billion, earnings will come to $1.4 billion, and it would be trading on a PE ratio of 9.2x, assuming you use a discount rate of 7.1%.
  
• Given the current share price of $65.34, the analyst price target of $98.57 is 33.7% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.