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Three Key Risks For Western Alliance Bancorporation (NYSE:WAL) You Should Know

The banking sector has been experiencing growth as a result of improving credit quality from post-GFC recovery. As a small-cap bank with a market capitalisation of US$5.7b, Western Alliance Bancorporation’s (NYSE:WAL) profit and value are directly affected by economic growth. This is because borrowers’ demand for, and ability to repay, their loans depend on the stability of their salaries and interest rates. Risk associated with repayment is measured by bad debt which is written off as an expense, impacting Western Alliance Bancorporation’s bottom line. Today I will take you through some bad debt and liability measures to analyse the level of risky assets held by the bank. Looking through a risk-lens is a useful way to assess the attractiveness of Western Alliance Bancorporation’s a stock investment.

Check out our latest analysis for Western Alliance Bancorporation

NYSE:WAL Historical Debt October 18th 18

How Good Is Western Alliance Bancorporation At Forecasting Its Risks?

Western Alliance Bancorporation’s ability to forecast and provision for its bad loans indicates it has a good understanding of the level of risk it is taking on. If the bank provisions for more than 100% of the bad debt it actually writes off, then it is considered to be relatively prudent and accurate in its bad debt provisioning. Given its high bad loan to bad debt ratio of 192.46% Western Alliance Bancorporation has cautiously over-provisioned 92.46% above the appropriate minimum, indicating a safe and prudent forecasting methodology, and its ability to anticipate the factors contributing to its bad loan levels.

What Is An Appropriate Level Of Risk?

Western Alliance Bancorporation is considered to be in a good financial shape if it does not engage in overly risky lending practices. So what constitutes as overly risky? Total loans should generally be made up of less than 3% of loans that are considered unrecoverable, also known as bad debt. When these loans are not repaid, they are written off as expenses which comes out directly from Western Alliance Bancorporation’s profit. Since bad loans only make up a very insignificant 0.47% of its total assets, the bank exhibits very strict bad loan management and is exposed to a relatively insignificant level of risk in terms of default.

Is There Enough Safe Form Of Borrowing?

Handing Money Transparent

Western Alliance Bancorporation makes money by lending out its various forms of borrowings. Deposits from customers tend to bear the lowest risk given the relatively stable amount available and interest rate. Generally, the higher level of deposits a bank retains, the less risky it is deemed to be. Since Western Alliance Bancorporation’s total deposit to total liabilities is very high at 95% which is well-above the prudent level of 50% for banks, Western Alliance Bancorporation may be too cautious with its level of deposits and has plenty of headroom to take on risker forms of liability.

Next Steps:

How will WAL’s recent acquisition impact the business going forward? Should you be concerned about the future of WAL and the sustainability of its financial health? The list below is my go-to checks for WAL. I use Simply Wall St’s platform to keep informed about any changes in the company and market sentiment, and also use their data as the basis for my articles.

  1. Future Outlook: What are well-informed industry analysts predicting for WAL’s future growth? Take a look at our free research report of analyst consensus for WAL’s outlook.
  2. Valuation: What is WAL worth today? Has the future growth potential already been factored into the price? The intrinsic value infographic in our free research report helps visualize whether WAL is currently mispriced by the market.
  3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.

To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.