Benefits of High Market Capitalization to Common Equity

The benefits of a high market capitalization to common equity are twofold. As an example, one benefit is Western Alliance Bancorp (WAL) sells at a market value equal to 2.9-times equity due to a spread of ROE less COE of 11.0%. The second benefit is a high ROE generates a high reinvestment rate or growth in common equity, thereby increasing market value at the reinvestment rate.

Western Alliance Bancorp demonstrates a simple business model stressing loans and deposits with a limited number of branches. Their customers tend to be a diverse cross section of all business and individuals. The bank, with $20 billion in assets, has a very clean balance sheet and very low non-interest expense when compared with its peers. Although heavily weighted in commercial real estate loans, Western Alliance Bancorp has been able to maintain low levels of non-performing assets. They also prefer to avoid high-risk derivatives. All of these characteristics with a high ROE provided earnings growth, which led to increasing share values. Western Alliance Bancorp share value, as of 2/16/2018, increased 1,638% since its low point in December of 2009 and outperformed its peers.


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