Morningstar DBRS Assigns Western Alliance Bancorporation's LT Issuer Rating at BBB; Positive Trend

DBRS, Inc. (Morningstar DBRS) assigned initial credit ratings to Western Alliance Bancorporation (WAL or the Company), including a Long-Term Issuer Rating of BBB, with a Positive trend. At the same time, Morningstar DBRS assigned credit ratings to its subsidiaries, Western Alliance Bank (the Bank), and Western Alliance Trust Company, N.A (the Trust Company), including Long-Term Issuer Ratings of BBB (high) with a Positive trend. The Intrinsic Assessment (IA) for the Bank is BBB (high), while the Support Assessment is SA1. The Company's Support Assessment is SA3 and its Long-Term Issuer Rating is positioned one notch below the Bank's IA.

KEY CREDIT RATING CONSIDERATIONS

The Company's credit ratings and Positive trend reflect its differentiated "branch-lite", commercial-oriented business model with a national footprint, as well as leading positions in multiple specialty lending and deposit verticals. The credit ratings are supported by WAL's strong organic capital generation, sound asset quality metrics and improved funding/liquidity profile. Of note, WAL faced challenges in the March 2023 timeframe during the failures of Silicon Valley Bank and Signature Bank. Since that real-time stress test, the Company has been able to steady its deposit franchise and bolster capital. The Company has also taken significant steps to diversify and strengthen its funding profile, including adding digital consumer and corporate trust deposit origination channels, and making significant investments to bolster its Treasury and ALM functions to bring capabilities more in line with larger regional peers. Overall, in Morningstar DBRS' view, WAL's unique business model and array of diversified business lines provide flexibility to adapt to the changing operating environment and continue to deliver solid performance.

The credit ratings also consider WAL's somewhat high concentration risk in its areas of specialization despite asset quality metrics that are consistently strong. Additionally, despite improvements, the Company is still reliant on specialty commercial deposit verticals that could result in a more volatile funding profile, especially when compared to many of its large regional peers that have greater proportions of sticky, retail branch-based deposits.

CREDIT RATING DRIVERS
If the Company continues to demonstrate sustained improvement in its funding profile, showing increased diversity and granularity of core deposit funding, the credit ratings would be upgraded. Additionally, decreased reliance on spread income and improved diversity of noninterest income sources while maintaining strong profitability metrics would also result in a credit ratings upgrade. Conversely, a significant weakening in the Company's funding & liquidity profile or an outsized deterioration in asset quality would result in a credit ratings downgrade.

CREDIT RATING RATIONALE

Franchise Combined Building Block (BB) Assessment: Good / Moderate
WAL is an $80.1 billion in assets "branch-lite" commercial-oriented regional bank with a national footprint and leading positions in multiple specialty lending and deposit verticals. Its most prominent verticals include Mortgage Warehouse, which is the Company's single biggest source of both loans and deposits, Hotel Franchise Finance, Tech & Innovation Banking, HOA Services, and Juris Banking, which provides customized solutions to attorneys such as legal settlement escrow. Its unique model centered around specialty business line expertise has driven outsized growth and profitability, albeit with some concentration risk. Its deposit franchise, with a heavy reliance on niche commercial origination channels, is a less stable source of funding than that of most large regional peers.

Earnings Combined Building Block (BB) Assessment: Good
WAL's business mix has historically produced robust risk adjusted returns. The Company benefits from a low fixed cost base and strong efficiency ratio driven by its "branch-lite" model. However, the Company is highly reliant on spread income, which has been significantly compressed for the last several quarters due to the challenging funding environment that has impacted WAL more than most peers. Specifically, the net interest margin ("NIM")(adjusted for ECRs) was 2.55% in Q3 2024 down from 3.40% at the end of 2022. Despite this, the return on average common equity (ROACE) remains solidly in the low teens with Q3 2024's results equating to a ROACE of 12.7%.

Risk Combined Building Block (BB) Assessment: Good / Moderate
Near pristine asset quality has been a hallmark for the Company as it is able to navigate exposure to some riskier segments through conservative loan underwriting and by focusing on specific niches where it has expertise. The portfolio is approximately 75%/25% commercial/consumer with the largest commercial concentrations in Warehouse Lending (15%), Tech & Innovation (6%), and Hotel Franchise Finance (7%). Office-related Investor CRE represents 5% of the portfolio. Consumer exposure is entirely residential real estate, and roughly 70% of that book is credit protected via either government guarantees or Credit-Linked Notes ("CLNs"). Overall, the Company's net charge-off (NCO) ratio was just 20 basis points (bps) for Q3 2024. which was higher compared to historical NCOs that have been in the single digits over the last eight years for WAL. Nonetheless, NCOs remain at the low end of peers. However, loan loss reserves and reserve to nonaccrual loan coverage are on the lower side compared to peers at 0.67% and 102%, respectively.

Funding and Liquidity Combined Building Block (BB) Assessment: Good
The Company has been able to improve its funding mix and resume core deposit growth, reducing its borrowings and brokered deposit usage and stabilizing its liquidity position after a challenging period in early 2023, sparked by the Silicon Valley Bank and Signature Bank failures. Specifically, in Q1 2023, WAL experienced elevated net deposit outflows of $6.1 billion requiring the Company to temporarily tap contingent sources of liquidity including wholesale brokered deposits and FHLB advances. WAL quickly stabilized and has since taken steps to improve its liquidity management and diversify its funding profile by establishing a digital consumer deposit origination channel. Morningstar DBRS notes that since Q1 2023, total deposits have grown by over $20 billion while brokered deposits and short-term borrowings have declined by $2.1 billion and $13.3 billion, respectively. WAL has also utilized reciprocal deposit networks to increase its proportion of insured deposits to above 70%, as compared to 45% at the end of 2022.

Capitalisation Building Block (BB) Assessment: Good
The CET1 ratio has grown to 11.2% in Q3 2024, up from 10.6% in Q3 2023. The velocity of capital accumulation is expected to accelerate as earnings improve, driven by declining interest rates which is expected to benefit the adjusted NIM and provide WAL with improved capital management flexibility. The Company expects to maintain their CET1 ratio at the 11%+ range. In addition, AOCI continues to have a diminishing impact on tangible capital as interest rates decline. Overall, AOCI losses embedded in capital have declined from a peak of $736 million at Q3 2022 to $382 million at Q3 2024.

Further details on the Scorecard Indicators and Building Block Assessments can be found at https://www.dbrsmorningstar.com/research/444962.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS

There were no Environmental/Social/Governance factor(s) that had a significant or relevant effect on the credit analysis.

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (August 13, 2024) https://dbrs.morningstar.com/research/437781.

Notes:
All figures are in US dollars unless otherwise noted.

The principal methodology is the Global Methodology for Rating Banks and Banking Organisations (June 04, 2024) https://dbrs.morningstar.com/research/433881. In addition Morningstar DBRS uses the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (August 13, 2024) https://dbrs.morningstar.com/research/437781 in its consideration of ESG factors.

The credit rating methodologies used in the analysis of this transaction can be found at: https://dbrs.morningstar.com/about/methodologies.

The primary sources of information used for these credit ratings include Morningstar Inc. and company documents. Other sources include Morningstar DBRS, Company Documents. Morningstar DBRS considers the information available to it for the purposes of providing these credit ratings was of satisfactory quality.

The credit rating was initiated at the request of the rated entity.

The rated entity or its related entities did participate in the credit rating process for this credit rating action.

Morningstar DBRS had access to the accounts, management and other relevant internal documents of the rated entity or its related entities in connection with this credit rating action.

This is a solicited credit rating.

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. Morningstar DBRS's trends and credit ratings are under regular surveillance.

For more information on this credit or on this industry, visit dbrs.morningstar.com.

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