KBRA Affirms Ratings for Western Alliance Bancorporation
MAY 21, 2020 - 6:40 am
Kroll Bond Rating Agency (KBRA) affirmed the senior unsecured debt rating of A-, subordinated debt rating of BBB+, and short-term debt rating of K2 for Western Alliance Bancorporation. KBRA also affirmed the deposit and senior unsecured debt ratings of A, subordinated debt rating of A-, and short-term deposit and debt ratings of K1 for Western Alliance Bank, the lead subsidiary. The outlook for all long-term ratings is stable.
The ratings are supported by Western Alliance’s solid financial profile, with above-peer returns in recent years driven by a robust NIM, facilitated by both favorable risk-adjusted loan yields and relatively modest funding costs. As fee income is not a key area of emphasis for the company, earnings remain largely spread dependent, which represents a moderate credit constraint compared to large regional peers.
With a heritage that includes core operations in markets subject to substantial home and CRE price volatility, KBRA noted that Western Alliance managed through the last financial crisis (post-2008) better than many peers and is now more diversified by market, industry, and collateral type. WAL is led by a seasoned management team with significant industry experience and sophisticated knowledge of regional markets.
In no small part attributable to the company’s sound underwriting and risk management practices, WAL appears well prepared to successfully navigate the challenging operating environment, in KBRA’s opinion. Moreover, KBRA views WAL’s relatively prudent core capital stance as a credit positive, particularly given the high degree of uncertainty around the totality of the economic downturn precipitated by COVID-19. WAL’s largest direct exposure to the phase 1 impact of the pandemic, its Hotel Franchise Finance portfolio (8.5% of loans), is viewed as manageable overall, reflecting the defined focus on the select service subsegment, as well as conservative weighted average LTV of 61% and DSCR of 1.9x combined with the likelihood of sponsor support in many cases.
The long-term ratings of the bank and its parent share a stable outlook. Thus, a ratings upgrade is not likely in the short to medium term. Further diversification efforts, combined with the continuance of overall strong performance, could lead to consideration of an upgrade over time. As the ratings incorporate a certain degree of resilience based upon KBRA’s stress testing, a rating downgrade in the near term is unlikely. Nonetheless, a meaningful change in risk profile or migration away from core competencies, a marked deterioration in credit quality, a substantial reduction in capital levels, or the adoption of a growth strategy that has significant earnings implications could potentially pressure the ratings.
KBRA’s ratings incorporate all material credit factors including those that relate to Environmental, Social and Governance (ESG) factors. While ESG factors may influence ratings, it is important to underscore that KBRA’s ratings do not incorporate value-based judgments. Throughout our analysis, KBRA captures the impact of ESG factors in the same manner as all other credit-relevant factors. More information on ESG Considerations for the Financial Institutions sector can be found here. An ESG factor that has a material impact on this rating is WAL’s strong risk management practices.
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