Deposit rebound at Western Alliance brightens US regional bank outlook

A rebound in deposits at Western Alliance Bancorp, one of the midsized lenders that was seen as the most at risk after Silicon Valley Bank collapsed last month, buoyed US regional bank stocks on Wednesday.

Western Alliance said it had regained nearly $3bn in deposits in the past few weeks, or more than 40 per cent that had hit the Phoenix-based bank since January 1, as it reported first-quarter earnings.

As one of the first regional lenders to report results since the collapse of SVB and Signature Bank, Western Alliance was seen by investors as a potential positive bellwether for the rest of the sector.

Its shares jumped 24.1 per cent as several other lenders hit hard during last month’s turmoil, including Zions, First Republic and PacWest, saw their shares trade up by between 7 and 13 per cent.

Some analysts warned there could still be pain ahead for other lenders, however. Citizens Financial, for instance, on Wednesday, said its deposits fell by $7.5bn, or 4.7 per cent, in the first quarter, which was more than analysts had expected. Its shares edged up 0.2 per cent on the day but were 2 per cent lower in after-hours trading.

“I don’t think the results will be all that good,” said Alexander Yokum, who follows regional banks for CFRA Research, of the overall sector. “But it will be bank by bank.”

Kenneth Vecchione, Western Alliance’s chief executive, told analysts that he thought his company had been unfairly compared with SVB in March, because Western also provides banking and lending to start-ups. That business makes up less than 20 per cent of its overall business, Vecchione said, far less than at SVB.

“People were clicking with their mouse and moving their money out first and then calling to let us know”, Vecchione said of large depositors. “Everyone who called us said that when the crisis is over we are going to come back. I doubt that is going to be dollar for dollar, but we are optimistic that deposits are going to come back.”

Western Alliance also highlighted a potential source of pain for it and other regional lenders when it said that the average rate it is paying on interest bearing accounts rose to 2.75 per cent in the first quarter, up from 0.2 per cent a year ago.

Now that interest rates are rising, banks are expected to have to pay depositors significantly more in interest to retain their customer accounts. Analysts expect this will hit profits.

Indeed, Western Alliance’s cost of deposits in the first quarter was up 1,550 per cent to $232mn, from $14mn in the same period a year ago. The bank also set aside $19mn for potential loan losses, more than double what it had put aside the same quarter a year ago. In all, first-quarter earnings fell 40 per cent, to $139mn, from the same period a year ago.

“You’re seeing deposit and funding costs really accelerate,” said analyst Chris McGratty, the head of US bank research at KBW. “They were accelerating before SVB and Signature. They’re only more acute now.”

Later on Wednesday, shares of Zions Bank fell more than 4 per cent in after-hours trading after it missed earnings estimates by a wide margin.

The bank reported earnings per share of $1.33, up from $1.27 a year ago, but far lower than the $1.53 that analysts were expecting. Deposits fell by 3 per cent to $69.2bn in the quarter.

Zions was swept up in the crisis of confidence that hit all regional banks last month.

Like other regional lenders, Zions had to raise the interest it pays on deposits to keep accounts. In the first quarter, its interest expense for deposits rose to $241mn. That was up from just $11mn in the same period a year ago.