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Investing.com -- Fitch Ratings has upgraded Western Alliance (NYSE:WAL) Bancorporation’s (NASDAQ:WAL) and its operating company, Western Alliance Bank’s (WAB), Long-Term Issuer Default Ratings (IDRs) to ’BBB’ from ’BBB-’, while maintaining a stable outlook. The Viability Ratings (VR) of both entities have also been raised to ’bbb’ from ’bbb-’, and the Short-Term IDRs have been affirmed at ’F3’.
The rating upgrade is attributed to the improved capital and funding profiles of Western Alliance Bancorporation. The company has demonstrated this improvement through increased capital levels, improved ratios, and a reduction in the loan-to-deposit (LTD) ratio. Fitch also noted WAL’s exposure to niche segments and anticipated growth areas as supportive factors for the rating upgrade.
The ratings benefit from WAL’s unique business model, which offers geographical diversity that most similarly sized peers lack. This was demonstrated in early 2023 when the company established and quickly achieved significant liquidity and capital targets without significantly affecting earnings potential, with plans subsequently updated and executed for 2024.
Fitch also recognized WAL’s focus on cultivating deeper customer relationships and its efforts to enhance granularity in both its deposit and lending profiles. The company has made strides in increasing the liquidity of its securities portfolio, and Fitch expects continued additions of High-Quality Liquid Asset securities as the company grows.
Fitch views WAL’s asset quality with caution. The ratio of impaired loans to gross loans declined slightly in 2024 but remains elevated compared to pre-2023 levels. However, Fitch does not expect this to impact the rating overall.
Fitch expects WAL’s net interest margin to remain among the highest in its peer group as the company continues to focus on reducing higher-cost wholesale borrowings. This strategy should mitigate the impact of potential rate cuts on the net interest margin and support an increase in operating profit to RWA, which has declined from the higher levels seen between 2020 and 2022.
WAL’s capital levels continued to improve in 2024, supporting a factor score upgrade. The CET1 ratio rose to 11.3% at YE 2024 from 10.8% at YE 2023. Fitch considers these higher capital levels appropriate given past deposit volatility and expects WAL to maintain its CET1 ratio above 11%.
Fitch’s assessment of WAL’s stabilized funding portfolio supports the factor score upgrade. WAL significantly reduced its loan-to-deposit ratio from first quarter of 2023 highs and decreased reliance on brokered deposits and Federal Home Loan Bank borrowings. Fitch expects continued reliance on core deposits and strategic contingent liquidity use.
Western Alliance Bancorporation operates as a bank holding company with Western Alliance Bank (WAB) as the main subsidiary. The company’s IDRs and VRs are equalized with those of its main operating subsidiary, WAB, reflecting its role as a BHC, which is mandated in the U.S. to act as a source of strength for its bank subsidiary.
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