What happened
Shares of Western Alliance Bancorp. (NYSE: WAL) fell 13.9% in May, according to data provided by S&P Global Market Intelligence. The bank was caught up in a month-long financial rout due to economic concerns and a growing belief that the Federal Reserve was done raising rates this year.
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So what
Financial stocks, including Western Alliance, were caught in a downdraft due to rising economic tensions between the United States and China. The ongoing trade wars are creating economic uncertainty, which investors fear could eat into loan growth at banks.
The weakness has also caused a U-turn by the Federal Reserve, which at one point was expected to continue to raise rates multiple times in 2019. In recent months, rates have been trending downward, putting pressure on bank interest margins.
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 that as rates rise, the bank can capture the lion’s share of the upside instead of sharing it with deposit customers.
For all the same reasons, investors tend to get nervous about Western Alliance if rates are expected to fall.
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That’s not to say the bank is performing poorly. Western Alliance, in late April, reported first-quarter earnings and net interest income that came in ahead of expectations, fueled by impressive deposit growth and sustained credit quality.
Now what
June got off to a good start when Western Alliance announced the initiation of a $0.25 quarterly dividend beginning in the third quarter. Executive chairman Robert Sarver said in a statement, “[T]he dividend demonstrates our continued confidence in the company’s performance outlook, including loan and deposit growth, interest margin, asset quality, operating efficiency and earnings per share.”
But the issues pressuring Western Alliance are not going to fade any time soon. The company released a surprisingly weak jobs report for May on June 7, and the market is now pricing in a 95% of a quarter-point Fed cut in July, according to BMO analysts. Just a few months ago, analysts had been expecting multiple rate hikes in 2019.
Shares of Western Alliance are down 30% in the past year. The confidence shown with the dividend announcement is not unfounded: Western Alliance will survive the current rate cycle. But it could take some time for the stock to start moving higher again.
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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.
