Fitch Ratings has affirmed the Long-Term Issuer Default Ratings (IDR) of Western Alliance Bancorporation (WAL) and Western Alliance Bank (WAB) at 'BBB-'.

The Rating Outlook is revised to Positive. Fitch has also affirmed both companies' Short-Term (ST) IDRs at 'F3'. A full list of rating actions is below.

Key Rating Drivers

The Outlook revision to Positive reflects Fitch's view of the entities' improved funding and liquidity profile as well as our assessment of the business profile in light of management's strategic changes after deposit stress in March 2023.

Unique Business Model: WAL's ratings reflect the benefits of the company's deposit-rich business mixed with a national business line. WAL has a lending presence nationally that provides geographic diversity at a scale that most similarly sized peers do not have. While WAL experienced stress in early 2023, its management set and rapidly achieved noteworthy liquidity and capital targets without sacrificing significant earnings potential, further supporting Fitch's positive assessment of the management team. WAL's ability to successfully and quickly execute different strategic plans during times of stress serve as the rationale behind the Positive Outlook.

Slower Growth; Enhanced Relationships: Fitch sees WAL's new focus on slower loan book growth and more holistic relationships as a positive. This may also help to address the issues that plagued the company in early 2023, causing outsized deposit outflows relative to other mid-tier peers. WAL has improved its securities portfolio as U.S. treasuries with a maturity of less than a year make up the largest portion of its AFS portfolio at 34.6% as of 4Q23.

Consistently Strong Asset Quality: WAL's ratio of impaired loans to gross loans increased to 102 basis points (bps) at YE23 up 81bps yoy due to a deteriorating operating environment. Net chargeoffs (NCO) remained low as the NCO ratio remained flat at 6 bps in 2023. Despite exposure to typically higher risk segments (hotel finance, office, etc.), Fitch believes that these risks are generally well managed and accompanied by low LTVs. However, macroeconomic factors may pressure asset quality in the medium term.

Earnings a Strength: WAL's earnings and profitability score is a ratings strength. With a robust ratio of operating profit to RWA averaging 2.1% over the four years ending in 2023 relative to peers, the bank firmly benchmarks in the 'a' category but is adjusted down for a lack of revenue diversification. Fitch anticipates net interest margin to remain among the top of WAL's peer group as the company focuses on paying down higher cost wholesale borrowings thereby limiting the impact of any potential rate cuts on net interest margin. This should help WAL to maintain its near best in peer operating profit to RWA ratio over our forecast horizon.

Impactful Capital Changes: WAL increased its CET1 ratio consistently throughout 2023 as a result of asset dispositions and the lack of a desire to grow the loan book at previous rates. As of 1Q24, WAL reported a CET1 ratio of 11%, well above YE22 levels of 9.3%. If adjusted for accumulated other comprehensive income, the company estimated a CET1 ratio of 10%, up from 7.9% at YE22. Fitch views the higher level of capital as appropriate given the turbulence in 1H23 and expects the company to maintain the CET1 ratio near 11% going forward.

Funding Stabilization: Fitch views the stabilization of the funding profile as the primary factor for the positive outlook for the rating. After deposits fell 11% in 1Q23, the company experienced rapid deposit growth throughout the rest of 2023 and into 2024. After growing $6.9 billion in 1Q24, deposits ended the quarter up 30.7% yoy. This has driven the loan-to-deposit ratio to 84.4% from a high of 112% at 1Q23. Borrower deposit concentration and lower on-balance sheet liquidity relative to peers remain as concerns, but the company's contingent liquidity has improved, benefitting from balance sheet optimization in 2023. WAL's share of insured or collateralized deposits improved to roughly 80% of total deposits in 2023 from 47% in 2022. Fitch anticipates that WAL will continue to focus on paying down higher cost wholesale borrowings despite already paying back $1 billion in 1Q24.

Holding Company: WAL has a bank holding company (BHC) structure with the bank as the main subsidiary. The company's IDRs and Viability Ratings (VRs) are equalized with those of its main operating subsidiary, WAB, reflecting its role as a BHC, which is mandated in the U.S. to act as a source of strength for its bank subsidiary. WAL's common equity double leverage of 113% is moderately below Fitch's 120% threshold and does not impact the rating. Fitch notes that liquidity at the holding company remains adequate but is reliant on upstreaming of dividends from the operating entity.

Rating Sensitivities

Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade

Negative rating momentum would be likely be predicated on a deterioration of the funding profile, such as a sustained decline in the share of non-interest-bearing deposits or core (relationship) deposits.

Negative rating momentum could also result from a decrease in total deposit funding below 80% of total non-equity funding or a perceived deposit franchise weakness.

Deterioration in asset quality could also result in negative rating action, such as a sustained increase in WAL's ratio of impaired loans above 2% or a rate of NCOs above the peer median.

Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade

Positive rating momentum would be based on a reversion of the loan to core deposit ratio (excluding brokered and reciprocal) below 120% while maintaining strong liquidity buffers.

Positive rating momentum would also be based on wholesale borrowing levels more in line with peers.

Positive rating momentum could develop should the bank improve its revenue diversification near peer median levels without an increase in its risk appetite or material reduction in net interest income on an absolute basis.

OTHER DEBT AND ISSUER RATINGS: KEY RATING DRIVERS

Long- and Short-Term Deposit Ratings: The uninsured long-term deposit rating of WAL's banking subsidiary, WAB, is rated one notch higher than the bank's LT IDR because U.S. uninsured deposits benefit from depositor preference. U.S. depositor preference gives deposit liabilities superior recovery prospects in the event of default. The uninsured short-term deposit rating of WAL's banking subsidiary is rated in line with the bank's ST IDR in accordance with our Bank Rating Criteria based on the bank's long-term deposit rating and Fitch's assessment of its funding and liquidity profile.

Subordinated Debt: The subordinated debt of WAL and WAB is notched one level below the respective entities' VRs for loss severity. In accordance with our Bank Rating Criteria, this reflects alternate notching to the base case of two notches due to Fitch's view of U.S. regulator's resolution alternatives for an entity like WAL, as well as early intervention options available to banking regulators under U.S. law.

Government Support Rating: Both WAB and WAL's Government Support Ratings (GSR) are 'No Support'. In Fitch's view, the probability of support is unlikely.

OTHER DEBT AND ISSUER RATINGS: RATING SENSITIVITIES

Long-and Short-Term Deposit Ratings: WAB's LT deposit ratings and ST deposit ratings are sensitive to changes in the bank's LT and ST IDRs as well as our assessment of its liquidity profile.

Subordinated Debt: Subordinated debt ratings are sensitive to changes in the respective company's VR.

Government Support Rating: The GSR would be sensitive to any change in U.S. sovereign support, which Fitch believes is unlikely.

VR ADJUSTMENTS

The VR has been assigned below the implied score due to the following reason(s): Weakest Link: Funding and Liquidity.

The Asset Quality score has been assigned below the implied score due to the following reason(s): Growth and Historical and Future Metrics.

The Earnings and Profitability score has been assigned below the implied score due to the following reason(s): Revenue Diversification

The Capitalization and Leverage score has been assigned below the implied score due to the following reason(s): Risk Profile and Business Model

The Funding and Liquidity score has been assigned below the implied score due to the following reason(s): Deposit Structure.

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

ESG Considerations

The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.

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