[Please note that all currency references are to Canadian dollar except if indicated otherwise.]
Canadian Western Financial institution (OTCPK: CBWBF; 31.79; financial institution; shares excellent: 89.7 million; market cap: $2.84 billion) is a comparatively small financial institution headquartered in Edmonton, Canada. The main target of the financial institution Small and medium sized firms.
The financial institution has monitor file of persistently growing earnings and dividends, however has lagged behind main Canadian firms over the previous 7 years as financial development in its major market, Alberta, has stagnated. Diversification, power and commodity costs have improved tremendously in Ontario, and the specter of rising rates of interest bodes properly for the financial institution’s outperformance.
a enterprise financial institution
Canadian Western Financial institution (“CWB”) gives private banking and enterprise banking providers to small and medium-sized firms with a concentrate on normal business banking, money administration providers, gear financing, and actual property building financing.
Curiosity earnings is the primary income for the financial institution, with 88% of 2021 income coming from that supply. Wealth administration is the primary contributor to non-interest earnings. Solely over 80% of its mortgage portfolio has been lent to companies, with the remainder lent to personal people.
Traditionally CWB generated most of its earnings from Western Canada however over the previous 5 years, the financial institution has expanded its operations to Ontario and different areas of the nation. The financial institution’s mortgage portfolio is now evenly distributed amongst clients situated in British Columbia, Alberta and the remainder of the nation.
The financial institution operated 40 banking facilities and had 2617 full time workers as of the tip of the 2021 monetary yr (October).
A strong working historical past – however behind Canada’s large banks
Though the financial institution has managed to develop its earnings and dividends at an affordable fee over the previous decade, its efficiency has lagged behind that of main Canadian banks. In comparison with top-performing Nationwide Financial institution of Canada (OTCPK: NTIOF), its annual earnings per share development fee was lower than half that, whereas its return on fairness was on common a 3rd decrease.
However, the financial institution has carried out persistently over the previous decade, with web earnings earlier than tax rising 110% to $480 million by the tip of the 2021 fiscal yr. Because the share rely elevated, earnings per share elevated by solely 81%, whereas dividends per share elevated by 115%. The guide worth per share as of the tip of fiscal 2021 was $33.10, up 138% from 10 years in the past.
Over the identical interval, the mortgage guide grew by 166% to $32.9 billion, whereas deposits grew by 142% to $30 billion.
The working ratio (non-interest expense/income) of the financial institution stood at 50.1% in 2021 and averaged 49.1% over the previous decade. Internet curiosity margin (web curiosity earnings / web belongings) stood at 2.50% in 2021, barely decrease than the 10-year common of two.66%.
Write-offs on loans as a share of common debt averaged 18 foundation factors over the previous 10 years, from a excessive of 32 foundation factors in 2016. The return on fairness stood at 11.8% in 2021 and averaged 11.7% over the previous decade.
Sturdy development in 2021
In its 2021 fiscal yr, income grew 13% to $1.0 billion as web curiosity earnings grew 12% and different earnings (primarily from wealth administration acquisitions) grew 26%. Bills additionally elevated 17% (principally labor prices) however a pointy reversal of mortgage impairment provisions made in 2020 led to a 31% enchancment in earnings per share to $3.74.
The dividend for the complete yr rose marginally to $1.17 after Canadian banks have been banned by the regulator from elevating dividends till the tip of 2021. The financial institution has a wonderful dividend monitor file and at the moment has a payout ratio of solely 31% of web earnings.
In December 2021 the financial institution stated it anticipated “double-digit” mortgage and deposit development and “low to mid-single-digit” development in earnings per share for the 2022 fiscal yr. The financial institution additionally expects non-interest bills to rise “within the low teenagers” in 2022.
Ontario – Extra Alternatives
The financial institution has expanded its operations exterior its house base in Western Canada over the previous 5 years. Loans given to clients in Ontario now cowl 23% of the mortgage guide, up from 15% in 2016. This portion of the mortgage guide is rising at 18% each year, properly forward of the financial institution’s common mortgage development of 9.1% each year. ,
Ontario’s economic system is far bigger than that of another Canadian province, accounting for about 40% of Canada’s GDP. Ontario can be house to 450,000 small and medium-sized firms, greater than Alberta and British Columbia mixed.
Given the dimensions of the Ontario market, it appears seemingly that CWB will proceed to develop its enterprise on this province and additional enhance its regional diversification.
rising rates of interest
About 90% of CWB’s income comes from curiosity earnings – so the financial institution’s profitability is delicate to the online curiosity margin. Since banks are usually in a position to enhance their margins when rates of interest rise, the CWB ought to be a serious beneficiary if Canada’s central financial institution raises a number of rate of interest hikes as anticipated in 2022-23.
The Financial institution’s Internet Curiosity Margin (“NIM”) has fluctuated between 2.16% and three.04% over the previous 15 years. The sensitivity of the financial institution’s web curiosity earnings (“NII”) is indicated within the desk with the 2021 incomes belongings and margins as the bottom case. Protecting all different variables fixed, the financial institution will have the ability to improve its NII to eight.6%, if it is ready to enhance its NIM to 2.80%.
wholesome commodity costs
Excessive oil and commodity costs help financial exercise in Alberta the place mining, power and agriculture contribute on to greater than a 3rd of GDP. These sectors are at the moment performing very properly, which can contribute to quicker credit score development for the financial institution.
In the course of the earlier power and commodity increase, the financial institution managed to extend its return on fairness (“ROE”) to over 15% (2007–2012). The desk beneath reveals the sensitivity of a financial institution’s web earnings to greater return on fairness. With 2021 as the bottom, and protecting all different variables fixed, an enchancment in ROE to 14% from the present 11.4% would result in a 22% improve in web earnings.
stability sheet in good order
As of the tip of FY 2021, the financial institution had a standard Tier 1 capital ratio of 8.8% and a complete capital ratio of 12.4%. In each circumstances, these ratios are properly above the regulatory minimal necessities. CWB just isn’t thought of a systemically necessary financial institution and is due to this fact not topic to the 100-basis level further capital requirement.
Funding is basically offered by financial institution department deposits and time period loans from brokers, which mixed represent 78% of the present funding complement.
threat on the horizon
Alberta, the place development relies on excessive commodity costs, stays an necessary marketplace for the financial institution. Though the financial institution has lowered its reliance on Alberta over the previous 5 years, weak spot in power and commodity costs will proceed to influence the financial institution’s efficiency.
The excessive correlation between the financial institution’s inventory value and the value of oil can be very noticeable. That is, in our opinion, not a good reflection of the diversified nature of the financial institution’s enterprise, however it stays a threat that buyers hyperlink the financial institution’s efficiency to the unpredictable value of oil.
Regardless of the struggles the financial institution skilled in its house market, Alberta, over time, it managed to develop primarily by way of diversification into the Ontario market. CWB hasn’t finished in addition to a few of its friends, however it’s poised for a significantly better efficiency for the subsequent few years.
The Financial institution will proceed with its enlargement in Ontario and the rise in rates of interest will assist its web curiosity margin. If present wholesome power and commodity costs stay in place, the financial institution is predicted to carry out strongly within the coming years.
Wanting on the inventory’s present value and consensus projections for the subsequent 12 months, the corporate has a price-to-earnings ratio of 10.6 occasions and a price-to-book ratio of 1.1 occasions.
We think about the present valuation to be pointless for enterprise that has the potential to considerably improve its earnings over the subsequent 2-3 years. If the financial institution is ready to deliver its return on fairness nearer to the peer group common, the inventory will rise accordingly. In our view, this leaves engaging upside potential with restricted draw back threat.