Over the last six months, Western Alliance Bancorporation’s shares have sunk to $75.80, producing a disappointing 10.5% loss while the S&P 500 was flat. This was partly due to its softer quarterly results and may have investors wondering how to approach the situation.

Is now the time to buy Western Alliance Bancorporation, or should you be careful about including it in your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free.

Why Is Western Alliance Bancorporation Not Exciting?

Despite the more favorable entry price, we're cautious about Western Alliance Bancorporation. Here are three reasons why there are better opportunities than WAL and a stock we'd rather own.

1. Deteriorating Efficiency Ratio

Topline growth is certainly important, but the overall profitability of this growth matters for the bottom line. For banks, we look at efficiency ratio, which is non-interest expense (salaries, rent, IT, marketing, excluding interest paid out to depositors) as a percentage of total revenue.

Investors place greater emphasis on efficiency ratio movements than absolute values, understanding that expense structures reflect revenue mix variations. Lower ratios represent better operational performance since they show banks generating more revenue per dollar of expense.

Over the last four years, Western Alliance Bancorporation’s efficiency ratio has swelled by 15.4 percentage points, hitting 53.3% for the past 12 months. Said differently, the company’s expenses have increased at a faster rate than revenue, which is usually raises questions in mature industries (the exception is a high-growth company that reinvests its profits in attractive ventures).

2. EPS Took a Dip Over the Last Two Years

While long-term earnings trends give us the big picture, we also track EPS over a shorter period because it can provide insight into an emerging theme or development for the business.

Sadly for Western Alliance Bancorporation, its EPS declined by 15.1% annually over the last two years while its revenue grew by 11.8%. This tells us the company became less profitable on a per-share basis as it expanded.

3. High Interest Expenses Increase Risk

Leverage is core to the bank’s business model (loans funded by deposits) and to ensure their stability, regulators require certain levels of capital and liquidity, focusing on a bank’s Tier 1 capital ratio.

Tier 1 capital is the highest-quality capital that a bank holds, consisting primarily of common stock and retained earnings, but also physical gold. It serves as the primary cushion against losses and is the first line of defense in times of financial distress.

This capital is divided by risk-weighted assets to derive the Tier 1 capital ratio. Risk-weighted means that cash and US treasury securities are assigned little risk while unsecured consumer loans and equity investments get much higher risk weights, for example.

New regulation after the 2008 financial crisis requires that all banks must maintain a Tier 1 capital ratio greater than 4.5% On top of this, there are additional buffers based on scale, risk profile, and other regulatory classifications, so that at the end of the day, banks generally must maintain a 7-10% ratio at minimum.

Over the last two years, Western Alliance Bancorporation has averaged a Tier 1 capital ratio of 11.6%, which is considered unsafe in the event of a black swan or if macro or market conditions suddenly deteriorate. For this reason alone, we will be crossing it off our shopping list.

Final Judgment

Western Alliance Bancorporation isn’t a terrible business, but it isn’t one of our picks. After the recent drawdown, the stock trades at 1.1× forward P/B (or $75.80 per share). While this valuation is reasonable, we don’t really see a big opportunity at the moment. We're pretty confident there are more exciting stocks to buy at the moment. Let us point you toward one of our top digital advertising picks.

Stocks We Would Buy Instead of Western Alliance Bancorporation

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