Asset Quality Improvements And Operational Efficiencies Will Strengthen Future Performance

Key Takeaways

• Strategic liquidity build and cost management aim to boost net interest margins and profitability.
  
• Diverse loan growth and strong asset management are set to enhance future earnings.
  
• Increasing asset quality risks, net interest margin compression, and reliance on volatile mortgage income could impact Western Alliance's profitability amidst uncertain capital requirements.

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's significant liquidity build in 2024 positions it to deploy future deposits into higher-yielding loans, enhancing revenue growth and net interest margin expansion.
  
• The company expects to reduce the cost of deposits, further expanding net interest margin and improving profitability. This should result in increased net margins and earnings.
  
• Continued loan growth and deposit gathering from diversified business lines, such as regional banking and escrow services, are anticipated, driving revenue growth.
  
• Asset quality management and a declining trend in charge-offs are expected to positively impact future earnings.
  
• Operating leverage improvements, with a goal of reducing the adjusted efficiency ratio below 50%, are likely to contribute to margin improvements and higher profitability.

Western Alliance Bancorporation Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Western Alliance Bancorporation's revenue will grow by 11.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from 25.7% today to 33.7% in 3 years time.
• Analysts expect earnings to reach $1.4 billion (and earnings per share of $12.69) by about January 2028, up from $774.9 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 10.3x on those 2028 earnings, down from 12.6x today. This future PE is lower than the current PE for the US Banks industry at 12.3x.
• Analysts expect the number of shares outstanding to grow by 0.64% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.17%, as per the Simply Wall St company report.

Western Alliance Bancorporation Future Earnings Per Share Growth

Risks

• The exposure to Southern California wildfires, despite being insured, represents risks to property assets under management, which could impact net income through potential operational disruptions.
  
• Falling rates have pressured margins as the bank’s asset yields declined, and while funding costs are adjusting, there's a risk of net interest margin compression affecting earnings.
  
• The increase in criticized and classified assets, particularly in CRE loans, highlights asset quality risks that may lead to higher provisions and net charge-offs, impacting net income.
  
• The bank’s significant reliance on mortgage banking income introduces earnings volatility, especially in a high-rate environment that could reduce mortgage demand and associated fee income.
  
• Future capital requirement uncertainties related to compliance costs associated with the Category IV bank preparation could pressure noninterest expenses, impacting profit margins and overall profitability.

Valuation

• The analysts have a consensus price target of $106.29 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 $118.0, and the most bearish reporting a price target of just $95.0.
  
• 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 10.3x, assuming you use a discount rate of 7.2%.
  
• Given the current share price of $89.17, the analyst's price target of $106.29 is 16.1% 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.