Thought on regional bank plays with earnings out? - I think they look good. Looking at WAL Preferred Stock as 66% upside and 7% divident
With regionals and banks declaring earnings this week I think they're looking pretty good. What happened in March with SVB and whatnot, in my opinion, is looking more and more like mania coupled with a some idiosyncratic band management practices at a couple banks mainly SVB. Curious if anybody has any plays or insight they want to share.
I'm looking pretty heavily at Western Alliance Preferred Shares ( $Western Alliance Bancorp (WAL.US)$ . $Proassurance (PRA.US)$ ). WAL was beat when rumors came out that it along with PACW were looking for significant asset shares that caused those two stocks to drop significantly. WAL came out and denied it and it appears it may have been a short run attempt, but either way WAL stock price still not all the way back.
WAL declared earnings this week and they're looking pretty good. Not only did they gain $3 billion dollars in deposits this quarter, going from about $47 billion to $50 billlion, but they've also indicated thye've had an additional $2 billion increase in deposits to date which would bring them up to $52 billion or so and, importantly, above where they were last year in deposits. Meaning not only was the flow-out not that bad, but they're actually starting to grow deposits above where they were before all the bank-runs happened this year.
Additionally, for real estate exposure, they have about $9 billion in CRE loans relative to about $50 billion in loans total, and only $2.3 billion of the CRE is in specifically office space and only 3% of that is in central business districts. They've focused more on suburban office space. Additionally, they're median Loan-To-Value ratio is about 58% meaning that if they building they gave CRE loans on dropped 40% in value, the bank's equity would still be protected and the bank would not take a hit (this is building specific but on a median overall level this should be true). Thus, their is significant downside protection before the bank's equity starts having to take a hit on the CRE they provided loans on. Accordingly, overall, it looks like they're pretty protected and outside or an apocalyptic type event - as oppose to CRE taking a 30% to 40% hit - WAL should be alright.
Their net interest income is also positive at about 3.4% and they expect it to start going up now with rates stabilizing and whatnot.
Thus, overall I think WAL is looking pretty attractive.
What I think is an interesting play though is there preferred stock. It's a fixed rate, value of $25 that when issued in 2021 was set at 4.25% payment. But, it resets every 5 years to the 5 year treasury rate plus 3.45%. The first reset date is 2026. Because treasury rates are high - meaning the 4.25% current payout has to normalize to current treasury rates plus a risk premium for the preferred not being a treasury - the preferred stock is currently trading at about $15.70 a share, an about 7% yield.
But, when the rate resets in 2026 to market rate/the stock derisks as more time goes on assuming there isn't a 2008 type fallout, then the base price should trend back up to $25 a share. And, if you buy now while it's a $15.70 and the rate resets in 2026 to likely a 6.5% yield or higher (if treasuries are 4% then the rate would reset to 7.45%), not only will the preffered stock value apprecaite back up to $25 a share but you would then be getting likely a 10% to 12% yearly dividend yield on what you bought it for.
Curious people's thoughts on this, or other play's they are looking at.
Summary: WAL.PRA currently trading at $15.70 with a 7% yield. The stock should appreciate to $25 by 2026 if everything goes smoothly and the yield rate will reset in 2026 to likely a 6.5% yield or higher. Thus, buying now you could be looking at getting a 7% yield while you wait for a 66% capital appreciation in the stock from $15.70 to $25 over the next couple of years; and, at that point, not only would you have 66% capital appreciation but when the rate resets you would likely be getting a 10% to 12% yearly dividend yield on what you invest.
I'm looking pretty heavily at Western Alliance Preferred Shares ( $Western Alliance Bancorp (WAL.US)$ . $Proassurance (PRA.US)$ ). WAL was beat when rumors came out that it along with PACW were looking for significant asset shares that caused those two stocks to drop significantly. WAL came out and denied it and it appears it may have been a short run attempt, but either way WAL stock price still not all the way back.
WAL declared earnings this week and they're looking pretty good. Not only did they gain $3 billion dollars in deposits this quarter, going from about $47 billion to $50 billlion, but they've also indicated thye've had an additional $2 billion increase in deposits to date which would bring them up to $52 billion or so and, importantly, above where they were last year in deposits. Meaning not only was the flow-out not that bad, but they're actually starting to grow deposits above where they were before all the bank-runs happened this year.
Additionally, for real estate exposure, they have about $9 billion in CRE loans relative to about $50 billion in loans total, and only $2.3 billion of the CRE is in specifically office space and only 3% of that is in central business districts. They've focused more on suburban office space. Additionally, they're median Loan-To-Value ratio is about 58% meaning that if they building they gave CRE loans on dropped 40% in value, the bank's equity would still be protected and the bank would not take a hit (this is building specific but on a median overall level this should be true). Thus, their is significant downside protection before the bank's equity starts having to take a hit on the CRE they provided loans on. Accordingly, overall, it looks like they're pretty protected and outside or an apocalyptic type event - as oppose to CRE taking a 30% to 40% hit - WAL should be alright.
Their net interest income is also positive at about 3.4% and they expect it to start going up now with rates stabilizing and whatnot.
Thus, overall I think WAL is looking pretty attractive.
What I think is an interesting play though is there preferred stock. It's a fixed rate, value of $25 that when issued in 2021 was set at 4.25% payment. But, it resets every 5 years to the 5 year treasury rate plus 3.45%. The first reset date is 2026. Because treasury rates are high - meaning the 4.25% current payout has to normalize to current treasury rates plus a risk premium for the preferred not being a treasury - the preferred stock is currently trading at about $15.70 a share, an about 7% yield.
But, when the rate resets in 2026 to market rate/the stock derisks as more time goes on assuming there isn't a 2008 type fallout, then the base price should trend back up to $25 a share. And, if you buy now while it's a $15.70 and the rate resets in 2026 to likely a 6.5% yield or higher (if treasuries are 4% then the rate would reset to 7.45%), not only will the preffered stock value apprecaite back up to $25 a share but you would then be getting likely a 10% to 12% yearly dividend yield on what you bought it for.
Curious people's thoughts on this, or other play's they are looking at.
Summary: WAL.PRA currently trading at $15.70 with a 7% yield. The stock should appreciate to $25 by 2026 if everything goes smoothly and the yield rate will reset in 2026 to likely a 6.5% yield or higher. Thus, buying now you could be looking at getting a 7% yield while you wait for a 66% capital appreciation in the stock from $15.70 to $25 over the next couple of years; and, at that point, not only would you have 66% capital appreciation but when the rate resets you would likely be getting a 10% to 12% yearly dividend yield on what you invest.
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