Western Alliance Bancorp in Phoenix has been in supercharged growth mode for several years, more than doubling its assets between 2019 and 2021 while building robust profit margins.
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All of that momentum — plus the company's above-peer loan growth and its low efficiency ratio — put Western Alliance at No. 1 on the 2021 list of top-performing banks with $50 billion or more of assets compiled by Capital Performance Group. It's Western Alliance's first appearance on the big-banks list, which for 2021 includes 39 large and regional banks ranked by their three-year return on average equity, starting with 2019. (See data table at bottom of article.)
Western Alliance, which crossed over the $50 billion-asset line in the third quarter of 2021, boasted a three-year ROAE of 18.64%, well above the group average of 10.03%. Return on average equity is a key financial metric that measures performance — specifically, how much income a company is creating for each dollar of stockholders' equity.
One of the factors contributing to Western Alliance's success is its lineup of 17 national businesses, Ken Vecchione, president and CEO of the now $66.1 billion-asset company, said in an interview. That lineup includes warehousing lending, note financing and settlement services.
"The reason why we're able to grow faster than other banks is we're a national bank with a regional footprint," said Vecchione, whose company has offices in Arizona, Nevada and California. "These national businesses can have a 3- or 4- or 5-to-1 ratio of revenue to expenses that helps generate higher return on equity for us. That's the nature of these businesses."
In 2021, Western Alliance's return on average equity was 22.29%, up from 16.07% in 2020 when it and other banks set aside reserves to cover pandemic-related credit losses. As fears about losses subsided, Western Alliance and its peers released provisions, resulting in widespread improvements in return on equity, said Claude Hanley, a partner at Capital Performance Group.
On average, return on equity for the group of 39 went from 7.36% in 2020 to 12.16% in 2021.
"Every institution in that tier reversed provisions to some degree in 2021," Hanley said.
But there are three areas that separate the top 10 banks on the list from the other 29: segment specialization, acquisitions or some combination of the two, Hanley said.
He pointed to SVB Financial Group, the Santa Clara, California, company catering to the technology sector that ranked No. 2 on the 2021 list, down from No. 1 the prior year. SVB, the parent company of Silicon Valley Bank,
He also highlighted Detroit's Ally Financial, the online bank whose primary business is auto financing. Ally rose from No. 18 on the list in 2020 to No. 6 last year, partly due to strong demand for auto loans.
East West Bancorp, the Pasadena, California-based company that captured the No. 5 spot on the list, is another example of a segment specialist that is a perennial top performer.
Although it dropped two spots from the 2020 list, East West's performance metrics were solid, including a three-year return on average equity of 13.68%. The company, which has $62.4 billion of assets, has built a business model around serving Chinese Americans, Chinese companies doing businesses in the U.S. and other immigrant groups, according to Irene Oh, chief financial officer since 2010.
Along the way, it has made investments to be able to sustain a high level of growth, Oh said.
"We always have a view to the future, and we always talk about metrics," Oh said. "What do we need to do to ensure long-term performance? How do we make sure our returns are enough?"
Chris McGratty, an analyst at Keefe, Bruyette & Woods, covers four of the top 10 best-performing banks — Western Alliance, SVB Financial, East West and Comerica in Dallas.
He pointed to a common denominator: All four are above-average growth companies, all benefit from higher interest rates, their efficiency ratios are good, and they have niche businesses.
The specialty lines are a key factor in an industry that isn't growing and isn't commoditized, he said.
"Some of the smartest players have figured out how to do things a little differently," McGratty said. "It's a fair statement to say that niche businesses do generate the potential for higher returns, and most banks are looking for a niche."
While it operates some of its specialty segments, Western Alliance aims to carve a deeper niche by transforming itself into the leading commercial bank in the country, Vecchione said.
"We know that's a lofty goal, right? But we're the 23rd-largest bank in the U.S., and when you look at the banks above us, no one else is fully focused on just being a commercial bank," he said.
The acquisition of AmeriHome in April 2021 was a major contributor to fee income, which rose by $333 million to $404 million last year, Hanley said. The uptick affected the company's return on average equity, which rose 6.2% year over year, and in turn lifted the three-year return on average equity, Hanley said.
The company had been a strong performer on Capital Performance Group's list for banks with $10 billion to $50 billion of assets. For 2020, it ranked No. 2, and the year before it was No. 1.
Western Alliance expects to reach $100 billion of assets "in a couple of years," though it hasn't provided a specific timeline for getting there, Vecchione said. It recently announced
As for what the list of top-performing big banks may look like in 2022, the downturn in mortgage lending will likely impede some institutions' performance, Hanley said. But by and large, the banks that have built niche businesses are going to continue to rank high on the list, he said.
"I think you're going to see the segment specialists remain in the top tier," Hanley said. "They've found these profitable niches and established themselves as premier providers in those niches."