Western Alliance Bancorporation has had an impressive run over the past six months as its shares have beaten the S&P 500 by 5.8%. The stock now trades at $88.35, marking a 19.7% gain. This was partly thanks to its solid quarterly results, and the run-up might have investors contemplating their next move.

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Why Is Western Alliance Bancorporation Not Exciting?

We’re happy investors have made money, but we don't have much confidence in Western Alliance Bancorporation. Here are three reasons we avoid WAL and a stock we'd rather own.

1. Lackluster Revenue Growth

Long-term growth is the most important, but within financials, a stretched historical view may miss recent interest rate changes and market returns. Western Alliance Bancorporation’s recent performance shows its demand has slowed significantly as its annualized revenue growth of 9.8% over the last two years was well below its five-year trend. Note: Quarters not shown were determined to be outliers, impacted by outsized investment gains/losses that are not indicative of the recurring fundamentals of the business.

2. Efficiency Ratio Expected to Falter

Topline growth is certainly important, but the overall profitability of this growth matters for the bottom line. For banks, we look at efficiency ratio, which is non-interest expense (salaries, rent, IT, marketing, excluding interest paid out to depositors) as a percentage of total revenue.

Investors place greater emphasis on efficiency ratio movements than absolute values, understanding that expense structures reflect revenue mix variations. Lower ratios represent better operational performance since they show banks generating more revenue per dollar of expense.

For the next 12 months, Wall Street expects Western Alliance Bancorporation to become less profitable as it anticipates an efficiency ratio of 56.6% compared to 51.8% over the past year.

3. EPS Took a Dip Over the Last Two Years

While long-term earnings trends give us the big picture, we also track EPS over a shorter period because it can provide insight into an emerging theme or development for the business.

Sadly for Western Alliance Bancorporation, its EPS declined by 5.8% annually over the last two years while its revenue grew by 9.8%. This tells us the company became less profitable on a per-share basis as it expanded.

Final Judgment

Western Alliance Bancorporation isn’t a terrible business, but it isn’t one of our picks. With its shares beating the market recently, the stock trades at 1.3× forward P/B (or $88.35 per share). This valuation multiple is fair, but we don’t have much faith in the company. We're fairly confident there are better investments elsewhere. We’d recommend looking at a fast-growing restaurant franchise with an A+ ranch dressing sauce.

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