Stripped of all other context, beleaguered banking firm Western Alliance Bancorporation (NYSE:WAL) might seem an intriguing platform for speculation. After all, shares bounced over 49% higher on May 5. However, risk-averse investors should probably stop playing games with the troubled enterprise. Fundamentally, WAL stock faces extremely difficult credibility issues ahead. Thus, I am bearish on the U.S. regional bank.
WAL Stock Moves on Dispelled Rumors, but It’s Still Ugly
On paper, WAL stock might not seem like such a poor wager, given the aforementioned powerful performance. That came off the back of management dispelling a Financial Times (FT) report that Western Alliance had called in a slate of advisors to look at several competitive options. As TipRanks contributor Steve Anderson stated, “One such option, naturally, was a full sale to someone else.”
Wrong, Western Alliance emphatically stated. Steve Anderson pointed out that WAL’s “total deposits had risen from $47.6 billion at the end of March to $48.8 billion in the most recent numbers. That certainly doesn’t seem like a bank about to go into a selloff.”
Despite the denial of the sale rumor and the threat of legal action regarding the allegedly false article, it begs the obvious question: why would a respected journalism outfit risk broadcasting fake news? As the BuzzFeed (NASDAQ:BZFD) layoffs recently demonstrated, online content distributors face massive challenges. They certainly don’t need to add to the headwinds.
Moreover, what the FT report mentioned was that WAL stock suffers from a tangential credibility problem. According to the article, Robert Sarver – former owner of the Phoenix Suns NBA basketball franchise – ran Western Alliance for much of the past two decades. However, Sarver had to sell the Suns for creating a hostile environment at the pro sports club. As well, he stepped down as chair of the bank as the NBA controversy escalated.
To be sure, the basketball incident and the implosion of WAL stock aren’t directly related. However, investors might not view Western Alliance’s denials as credible, given the aforementioned controversy. That could negatively impact WAL.
Waning Incentive to Trust Banks
Moving beyond specific headwinds impacting WAL stock, investors should also note that the banking sector faces waning incentives among clients. In particular, while the Federal Reserve has been raising the benchmark interest rate since last year, savings account rates lag considerably. That’s according to data cited by CBS News back in September 2022.
To be sure, a depletion of deposits combined with banks holding onto assets that were suddenly worth less (a casualty of the sharp rise in rates) contributed to this year’s banking crisis. However, with that said, depositors simply don’t have much incentive to trust the banks.
True, Western Alliance posted an increase in total deposits. However, with money held in savings accounts suffering a negative real return – due to inflation being stubbornly high – depositors have every reason to consider alternatives. Therefore, it’s no guarantee that Western Alliance will continue impressing onlookers with rising deposits.
Finally, arguably the biggest headwind against trust banks centers on the investors. As federal government agencies pointed out throughout this banking crisis, the U.S. focuses on depositors. It will not protect shareholders.
To be blunt, an increasing number of WAL stock investors may ask, what’s the point of carrying this risk? Without a clear and confidence-inspiring answer, stakeholders may hit the exits to salvage something, anything other than a total loss.
Even the Financials Present Some Concerns
Primarily, the concerns for WAL stock center on what may be, not what is. Sure, circumstances might seem favorable now, as Anderson alluded to. However, with rising economic pressures such as mass layoffs, Western Alliance may struggle in the future. And on that note, the financials don’t seem particularly encouraging.
Mainly, total revenue in the first quarter of this year came out to $446.8 million. However, that’s a sizable decline of nearly 15% from the year-ago quarter’s sales tally of $525 million.
To be fair, total assets increased dramatically year-over-year to $71.05 billion from $60.58 billion. Unfortunately, though, with declining incentives to trust banks combined with a fading economy, WAL stock faces significant challenges on the horizon.
Is WAL Stock a Buy, According to Analysts?
Turning to Wall Street, WAL stock has a Strong Buy consensus rating based on 11 Buys, two Holds, and zero Sell ratings. The average WAL stock price target is $54.50, implying 99.5% upside potential.
The Takeaway: Investors Can’t Trust WAL Stock
Overall, the central issue working against WAL stock is trust (or lack thereof). Depositors can’t trust Western Alliance because of savers’ negative real interest rate dilemma. Investors can’t trust WAL because it could go to zero without any governmental protection. Finally, the public might not trust the bank because of a recent ugly scandal. Unfortunately, the safer answer may be to stay away.
