Is there any value left in U.S. bank stocks?
The nation's biggest lenders -- JPMorgan Chase & Co., Wells Fargo & Co., Bank of America Corp. -- are basically priced to perfection. So too are large regional banks such as US Bancorp and PNC Financial Services Group Inc. as well as investment banks like Goldman Sachs Group Inc.
Think a little smaller, though, and growth-focused lenders with value potential do exist -- like Western Alliance Bancorp. The Phoenix-based bank already surged 34 percent since Nov. 8 in the post-election rally, and analysts reckon it could gain another 12 percent over the next year. There are plenty of reasons for their optimism.
With some $17 billion in assets, Western Alliance operates in Arizona, California and Nevada -- specifically in areas with population growth and household income that's slated to be higher than the national average:
The bank's focus on providing commercial loans to industries such as hospitality, non-profits, life sciences, health care and technology is paying off. Loan growth was 18.6 percent in 2016 and roughly 20 percent on a compounded annual basis since 2005. It's also particularly sensitive to rising rates: a 100 basis-point increase (we're currently half the way there) is expected to bump its net interest income roughly 6 percent higher.
There's another way Western Alliance can grow: The bank is primed to make an acquisition, in part because it hasn't been spending capital on dividends or share buybacks. Its rich valuation -- at a price-to-tangible-book-value multiple of 3.4 -- gives it one of the strongest currencies with which to pounce.
Rivals with footprints in California, Colorado or the Pacific Northwest make geographic sense. But Western Alliance Bancorp should only settle for targets that add to both earnings and profitability, according to Sandler O'Neill & Partners LP's Brad Milsaps. As it is, few banks can match Western Alliance's 2016 performance: return on tangible common equity of 18 percent, return on equity of 15 percent and return on assets of 1.6 percent.
Potential targets include CU Bancorp Inc., Heritage Commerce Corp. and CoBiz Financial Inc., and it would be a "coup" for Western Alliance to snap up any of these "marquee" lenders, Sandler O'Neill & Partners' Tim O'Brien told Gadfly. Purchases of larger banks like CVB Financial Corp. and Westamerica Bancorporation may also be a fit.
An order published Thursday by the Federal Reserve is set to make regional-bank dealmaking more appealing. The Fed said that acquisitions of less than $10 billion of assets or transactions that create lenders with less than $100 billion in assets do "not raise material financial stability concerns." That's an increase from $2 billion and $25 billion, respectively, and gives lenders scope to make bigger transaction without raising regulatory red flags. Potential buyers should still be aware of the $50 billion threshold that classifies a bank as a systemically important financial institution, or SIFI. That can only be tweaked by Congress.
Even with any near-term purchase, Western Alliance has a long runway before it bumps up against that limit. And without a deal? It's compelling, too.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
Gillian Tan is a Bloomberg Gadfly columnist covering deals and private equity. She previously was a reporter for the Wall Street Journal. She is a qualified chartered accountant.
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