WESTERN ALLIANCE BANCORPORATION
Fitch Ratings has revised the Rating Outlooks for
Fitch affirmed both companies' Long-Term (LT) Issuer Default Ratings (IDRs) at 'BBB-' and their Short-Term (ST) IDRs at 'F3'.
Key Rating Drivers
Funding Stabilization: Today's rating action is underpinned by improvements in WAL's funding and liquidity profile, which was revised to stable from negative. Deposit outflows have demonstrated stability for two consecutive quarters, demonstrating a recovery from March. Deposit concentration still remains a concern, but the company's contingent liquidity has improved, benefitting from balance sheet optimization and loan disposals. The company's gross loans to customer deposits ratio improved to 94% in 3Q23 from 112% at 1Q23 while its uninsured deposit liquidity coverage improved to 293%. The company continues to rely on brokered deposits, which represent 35% of total deposits (23% reciprocal and 12% wholesale).
Slower Growth a Positive: Historically, high growth and the matching of national business lines with deposit-rich business lines has helped WAL blend higher-yielding loans with relatively low-cost deposits. This helped to provide above peer average profitability and additional geographic diversity that many peers at WAL's size do not have. In Fitch's view, this may have contributed to a lack of depth of deposit relationships that helped fuel deposit instability earlier in the year. Fitch views WAL's new focus of whole banking relationships with clients more favorably.
Growth Moderating: WAL experienced rapid and outsized growth in the preceding two years, which contributed to its disproportionate challenges earlier this year. Fitch expects that WAL's asset growth will be more in line with general industry and GDP growth. Fitch views a lower loan growth trajectory as a relative positive especially if coupled with continued strong underwriting standards.
Consistently Strong Asset Quality: WAL's asset quality has been consistently strong and is supportive of the rating. The ratio of impaired loans to gross loans doubled in 2Q23 but still remains low at only 74 bps. The company's net chargeoff (NCO) ratio exceeded 6bps for the first time in the past eight years (NCO ratio of 7bps for 3Q23, with a four-year average of 3bps). Although WAL lends in some traditionally higher-risk segments, such as hotel franchise financing and Office, Fitch believes that these risks are generally well managed. Macroeconomic factors may pressure asset quality in the medium term.
Earnings Strength: WAL's earnings and profitability score is considered a rating strength for the firm. With strong operating profit to RWA compared to peers, the bank firmly benchmarks in the 'a' category but is adjusted down for a lack of revenue diversification. WAL has one of the best net interest margins amongst its peer group. The bank also operates an extremely efficient business model, though mark-to-market adjustments in 1H23 have impacted this ratio recently.
Capital Accretion Realizing: As of 3Q23, WAL reported a CET1 ratio of 10.6%, well above 3Q22 levels of 8.7%. If adjusted for unrealized losses in its held-to-maturity and available-for-sale investments, the company estimated a CET1 ratio of 8.8% at 3Q23, up from 7.9% at YE22. Fitch views the higher level of capital management as adequate given the turbulence in 1H23.
Government Support Rating: WAL's Government Support Rating (GSR) is 'No Support'. In Fitch's view, the probability of support is unlikely.
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 the operating company and bank, reflecting its role as the BHC, which is mandated in the
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 further 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 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 1% 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 below 120% while maintaining strong liquidity buffers.
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
The uninsured long-term deposit rating of WAL's banking subsidiary is rated one notch higher than the bank's Long-Term (LT) IDR because
WAL's subordinated debt is notched one level below the respective entities' Viability Ratings (VRs) for loss severity. In accordance with the 'Bank Rating Criteria,' this reflects alternate notching to the base case of two notches due to Fitch's view of
The notching on WAL's preferred stock is four levels below its VR, two times for loss severity and two times for non-performance. These are in accordance with Fitch's criteria and assessment of the instrument's non-performance and loss severity risk profile.
OTHER DEBT AND ISSUER RATINGS: RATING SENSITIVITIES
Long-and Short-Term Deposit Ratings
Fitch has assigned a new rating to
The LT deposit ratings and ST deposit ratings of WAL's subsidiary bank are sensitive to changes in the company's LT IDR.
WAL's subordinated debt rating is sensitive to changes in the company's LT IDR.
SUBSIDIARIES & AFFILIATES: KEY RATING DRIVERS
Holding Company: WAL has a bank holding company (BHC) structure with the bank as the main subsidiary. The company's IDRs and VRs are equalized with those of the operating company and bank, reflecting its role as the bank holding company, which is mandated in the
SUBSIDIARIES AND AFFILIATES: RATING SENSITIVITIES
WAB's ratings are sensitive to any changes in WAL's LTIDR.
VR ADJUSTMENTS
The Viability Rating 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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