Wells Fargo sidelined on Western Alliance as guidance leaves ‘little room for error’

Wells Fargo downgraded Western Alliance Bancorporation (NYSE:) to an Equal Weight rating (From Overweight) and raised their 12-month price target for the stock to $72.00 (From $62.00) as analysts see a limited margin for error based on the company’s current results and guidance.

“Our view that WAL would show better-than-expected deposit resiliency post-SVB has played out. Now, current expectations leave little room for error on 1) Costs, 2) Credit, and 3) Regulation,” wrote Wells Fargo analysts in a note.

In H2 2024, costs rose by 16% compared to H1, mainly due to higher deposit ECR, increased spending on technology and insurance. The company projects a nearly 10% YoY growth in expenses for FY2024, despite anticipated lower deposit costs from Federal Reserve rate cuts.

The FY2024 forecast of 5-15bps of NCOs is considered ambitious. Despite good credit performance in FY2023 (NCOs at 7bps), concerns arise as classified assets grew by $34 million QoQ, reaching 0.95% of loans. Of these, 40% are linked to less certain retail and office segments. Management claims only 1% of special mention loans lead to charge-offs, but with current guidance and an ALLL of 0.89%, there’s minimal room for error.

Regulation, liquidity, and capital build impact profitability, as excess deposits fund HQLA and capital. The 11% CET1 target is expected in 1Q24, but management sees it as a floor, with capital likely growing through FY24. FY24/25 ROTCE estimates are aligned with peers but below pre-pandemic levels.

Operational results at $1.87 were slightly below the $1.88 estimate. Improved revenue and reduced provisions balanced a higher expense base. NII improved by 0.8% QoQ, surpassing the estimated flat rate. The NIM decline of 2 basis points to 3.65% was narrower than expected, reflecting lower funding costs from the repayment of high-cost borrowings. Asset yields were weaker due to the focus on building HQLA.

Shares of WAL are down 1.59% in mid-day trading on Tuesday.