What happened
Shares of Western Alliance Bancorporation (NYSE: WAL) fell 11.3% in March, according to data provided by S&P Global Market Intelligence, after the Federal Reserve spooked investors in financial services companies generally and holders of this interest-rate-sensitive stock in particular.
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So what
Western Alliance, which is based in Arizona and also has operations in California and Nevada, was one of a number of regional banking companies hit hard by an unexpected dovish turn by the Federal Reserve that threw future rate increases into doubt. Financial shares fell further as 10-year Treasury bond yields fell below the yields on a three-month Treasury, meaning the yield curve was inverted for the first time since 2007. Investors often view an inverted yield curve as a sign of economic trouble on the horizon.
The market has been skittish about Western Alliance for some time now. The company’s shares fell nearly 15% in late October after some confusion about the bank’s outlook for 2019 and continued to drift downward for the remainder of the year.
Western Alliance is an ideal bank to own in a rising interest rate environment due to its focus on niche markets, including providing banking services to local governments, homeowners’ associations, and hotel franchises, among others. Nearly half of its deposits are noninterest-bearing, meaning as rates rise, it can capture the lion’s share of the upside instead of sharing it with deposit customers.
Now what
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Given how interest-rate-sensitive Western Alliance is, the Fed’s pause and the potential underlying weakness in the economy that is causing it cut into the bull case for Western Alliance. The bank could be particularly vulnerable to an economic slowdown due to the number of commercial and real estate loans it has in its portfolio and its lack of fee income that can buffer losses in the loan portfolio.
This is a good operator, but given its profile, investors might want to get more clarity on where the Fed — and the broader economy — is heading before buying in.
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Lou Whiteman has no position in any of the stocks mentioned. The Motley Fool recommends Western Alliance Bancorp. The Motley Fool has a disclosure policy.
