WESTERN ALLIANCE BANCORPORATION
Fitch Ratings has published a Long-Term (LT) Issuer Default Rating (IDR) of 'BBB+' to
The Rating Outlook on the LT IDR is Stable. Fitch has also published WAL and WAB's Short-Term (ST) IDR of 'F2'.
Key Rating Drivers
Rating Reflects Strengths: The rating reflects WAL's diversified business model and better-than-peer earnings, consistently strong asset quality, and adequate funding profile. These strengths are offset by lower than peer capital ratios as well as the bank's consistently higher-than-peer levels of loan growth.
Regional and National Lines Support Company Profile: WAL's company profile combines a regional commercial bank footprint with nationally oriented specialty businesses. The bank's business model allows for the strategic matching of its national business lines with other deposit rich businesses, blending higher yielding loans with lower cost deposits. WAL further bolstered its national presence with the 2021 acquisition of AmeriHome Mortgage (AMH), a leading national mortgage provider. The bank holds strong market share in its primary Southwest footprint.
Growth Risks Partly Offset by Experienced Underwriting: Fitch views WAL's level of loan growth over the past several years cautiously and considers it a ratings constraint. The bank has averaged over 20% growth annually over the past several years, well above peer levels. Generally, growth has been spread across the various regional and national businesses, primarily in lower-risk assets. Additionally, the largely secured nature of the loan portfolio is seen as a partial mitigant to risks associated with the high level of growth.
Consistently Strong Asset Quality: WAL's asset quality has been consistently strong and is viewed as a credit strength. The ratio of impaired loans to gross loans was only 20 bps at 2Q22, and the company's annual net charge-off ratio has not exceeded 6 bps in the past eight years. Although WAL lends in some traditionally higher risk segments, such as hotel franchise financing and other commercial real estate (CRE), Fitch believes that these risks are generally well-managed by clearly defined lending and credit monitoring procedures and solid underwriting standards, as evidenced by the bank's low level of credit losses in recent years.
Earnings a Strength: WAL's ratings are supported by its strong earnings profile. The bank's earnings are among the highest in its peer group, generating an operating profit to risk weighted assets ratio above 2.0% over the last four years and through the first half of 2022. The acquisition of AMH in 2021 further diversified the bank's earnings profile, as fee income contribution increased from 6% for YE20 to 17% for the quarter ended
Capital Below Peers: Fitch considers WAL's capital levels as a rating constraint over the rating time horizon. The bank's 2Q22 CET1 ratio of 9.0% was notably lower than the peer median of 11.3% and is viewed as relatively weak, especially given WAL's aforementioned high levels of loan growth and relative concentration in CRE. However, WAL's strong internal capital generation is viewed as partially offsetting its lower capital ratios.
Solid Funding Profile: WAL's funding profile supports the bank's overall ratings. WAL's funding and liquidity profile benefitted from the influx of banking system deposits in 2020 and 2021, with total loans to customer deposits dropping to 82% in mid-2021. The LTD ratio has since rebounded to 96% at 2Q22, above pre-pandemic levels and most of the peer group, as loan growth has outpaced deposit growth. Although the bank's LTD ratio generally screens on the higher end of peers, the bank maintains high levels of non-interest-bearing deposits as a percentage of total deposits, which is viewed positively.
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
Government Support Rating: Fitch has assigned a Government Support Rating of 'No Support'. In Fitch's view, the probability of support is unlikely.
Rating Sensitivities
Factors that could, individually or collectively, lead to negative rating action/downgrade:
WAL's ratings could come under pressure if the bank's CET1 were to continue to trend downward below 9% and remain there for multiple quarters absent a credible plan to build up capital levels.
Negative pressure could be placed on WAL's ratings should there be evidence of outsized deterioration in the level and stability of earnings relative to peers, particularly if not offset by increases in capital levels. For instance, failure to maintain an implied earnings rating in the 'a' category, with earnings as measured by operating profit to RWA falling below 1.5%, could result in negative ratings pressure.
A significant deterioration in asset quality could also result in negative rating action. Pressure could emerge if WAL's impaired loans to gross loans ratio were to deteriorate significantly below the peer median, especially if accompanied by a sharp increase in the bank's net charge-off ratio.
Should WAL's holding company begin to exhibit signs of weakness, demonstrate trouble accessing the capital markets, or have inadequate cash flow coverage to meet near-term obligations, there is potential that Fitch could notch the holding company VR from the ratings of the operating company. Should WAL increase double leverage to levels above 120%, or if available cash held at the holding company falls below 1.0x forward 12-month obligations, including interest, operating expenses, and dividends, without a credible plan to increase liquidity, the holding company IDR could be notched down from the bank-level VR and IDR.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Fitch views WAL's ratings as well situated with limited upside potential over the near-to-medium term. Over the longer term, a potential upgrade would likely be predicated on a more conservative stance to capital management along with a reduction in risk appetite, indicated by sustained higher levels of capital, as measured by the bank's CET1 ratio, that are in-line with peer medians, coupled with a sustained decrease in loan growth.
Positive rating momentum could also develop should the bank's revenue diversification improve and remain in-line with higher rated peers for a sustained period of time without a rise in the bank's risk appetite or deviation from current earnings performance.
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 is rated one notch higher than the bank's LT IDR because
Subordinated Debt
WAL's subordinated debt is notched one level below the respective entities' 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
OTHER DEBT AND ISSUER RATINGS: RATING SENSITIVITIES
Long-and Short-Term Deposit Ratings
The long-term deposit ratings and short-term deposit ratings of WAL's subsidiary bank are sensitive to changes in the company's Long-Term IDR.
Subordinated Debt
WAL's subordinated debt rating is sensitive to changes in the company's Long-term IDR.
VR ADJUSTMENTS
The Asset Quality score has been assigned below the implied score due to the following reason(s): Growth and Historical and Future Metrics.
The Funding and Liquidity score has been assigned below the implied score due to the following reason(s): Deposit Structure.
Best/Worst Case Rating Scenario
International scale credit ratings of Financial Institutions and Covered Bond issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from '
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
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This 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. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg.
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