TLDR
- Western Alliance stock dropped 10.8% on October 16 after disclosing a fraud-related lawsuit over a $100 million loan, while Zion Bancorp took a $50 million charge-off on alleged fraud
- RBC Capital Markets calls the regional bank sell-off overdone, with 13 of 14 analysts rating Western Alliance as a buy with price targets around $103
- The KRE regional banking ETF fell 6% amid credit concerns, though analysts say core fundamentals remain strong at most regional banks
- Western Alliance reports Q3 earnings on October 21, with analysts expecting $2.11 per share on $891 million revenue
- JPMorgan and RBC raised Western Alliance price targets to $105 and $100 respectively, seeing 30% upside from current levels near $70
Western Alliance Bancorp stock traded around $70 on October 17 after plunging 10.8% the previous day. The drop came after the bank filed a lawsuit alleging fraud by borrowers on a $100 million loan.
Western Alliance Bancorporation, WAL
The Phoenix-based lender disclosed it had initiated legal action against Cantor Group V, LLC for allegedly forging real estate loan documents. Western Alliance has not yet taken a loss on the loan but the news rattled investors already nervous about regional bank credit quality.
Zion Bancorp added to the sector’s troubles by disclosing a $50 million charge-off tied to suspected fraud. The dual revelations sent regional bank stocks lower across the board on October 16.
The KRE regional banking ETF fell approximately 6% as investors worried about hidden credit problems. Stephen Biggar, a banking analyst at Argus Research, said the incidents show poor credit at one bank can drag down the entire group quickly.
Western Alliance’s stock had already declined about 4% on October 8 due to indirect exposure to First Brands Group’s bankruptcy. The auto-parts supplier filed Chapter 11 with up to $50 billion in liabilities in late September.
A Jefferies-managed fund holds roughly $715 million of First Brands receivables, raising concerns about Western Alliance’s dealings with Jefferies. Bank management stressed its criticized loans were actually lower at the end of September than in June.
Analysts Maintain Bullish Outlook
Wall Street analysts have kept their positive ratings on Western Alliance despite the turbulence. JPMorgan analyst Anthony Elian raised his price target to $105 with an Overweight rating in early October.
RBC Capital’s Jon Arfstrom increased his target to $100 and maintained an Outperform rating. The consensus price target among analysts sits around $103, implying roughly 30% upside from current levels.
Thirteen out of 14 analysts covering the stock rate it a buy or equivalent. TD Cowen and National Bank have even higher targets in the $115 to $118 range.
RBC Capital Markets said the recent sell-off created an opportunity to add quality bank stocks. The firm specifically mentioned Western Alliance, Zion Bancorp, and First Horizon as banks where declines appear overdone.
Analysts who reported third-quarter results showed sequential loan growth and positive margin trends. First Horizon, Synovus Financial, and Home Bancshares all demonstrated controlled expenses and healthy credit metrics.
Strong Earnings Expected Next Week
Western Alliance reports third-quarter earnings on October 21 after market close. Analysts forecast $2.11 in earnings per share on approximately $891 million in revenue.
Those numbers would represent growth from the second quarter, which saw $1.91 per share on $718 million in revenue. The bank’s profitability has benefited from higher interest income and loan growth.
Management plans to address the fraud lawsuit and First Brands exposure on the earnings call. Western Alliance said it would provide context about its diversified business model and strong credit structures.
The bank emphasized its capital position remains strong and total loans and deposits are healthy. The alleged fraud appears to be an isolated incident involving specific borrowers rather than a systemic issue.
Mike Mayo, a bank analyst at Wells Fargo, noted these cases show that loose credit periods can lead to more fraud instances. He said credit quality generally remains fine but recent issues require close monitoring.
Western Alliance pays a quarterly dividend of $0.38 per share, yielding roughly 2% annually. There is no indication the dividend will be affected by recent events.
Banking Sector Shows Mixed Signals
Major banks posted strong third-quarter results in recent days, with JPMorgan Chase, Bank of America, Wells Fargo, and Morgan Stanley beating earnings forecasts. Trading revenues and loan growth came in stronger than expected.
The positive big bank earnings initially lifted regional bank stocks earlier in the week. Western Alliance gained over 5% on October 13 and continued climbing on October 14.
However, the fraud disclosures reversed those gains quickly. The late-week sell-off showed investor nerves remain sensitive after the spring 2023 regional banking crisis.
Jim Reid, a strategist at Deutsche Bank, said the isolated incidents at two small banks drew inevitable comparisons to the stress following Silicon Valley Bank’s collapse. Any hint of hidden credit problems can send the market into risk-off mode.
The bank is approaching $100 billion in assets, which analysts note could ease some regulatory requirements. Western Alliance has been expanding its tech and venture banking business while growing deposits.