Canadian Western Bank (TSX: CWB) is a diversified financial services organization. The bank’s key business lines include full-service business and personal banking offered through bank branches and Internet banking services provided by Motive Financial. The bank offers specialized financing under the banners of CWB Optimum Mortgage, CWB Equipment Financing, CWB National Leasing, CWB Maximum Financial and CWB Franchise Finance. The group also offers trust services and wealth management services.

Investment Rationale

• Robust Branch-raised Deposit Growth in Q4: In the fourth quarter, the bank reported robust branch-raised deposit growth of 20%, which included a 34% increase in demand and notice deposits and a 13% reduction in broker deposits. Further, strong branch-raised deposit growth and proactive deposit pricing measures provided a five-basis point sequential increase in the bank’s fourth quarter net interest margin.

Source: Company Presentation, Q4FY20.

• Strong capital position: The bank has a strong regulatory capital position under the Standardized approach, with very conservative Basel III leverage ratio. The bank’s CET 1 ratio stood at 8.8%, Tier 1 ratio at 10.9% and 12.6% total capital ratio on October 31, 2020. The company remain conservatively capitalized through the current economic conditions. Further, the bank’s Basel III leverage ratio of 8.5% at October 31, 2020 remains very strong. Also, the capital ratio stood well above the regulatory requirement.

Source: Company Presentation

• Lower exposure to troubled sector: Oil & gas sector is going through a steep pain since the outbreak of COVID-19 pandemic. Most of the players are booking huge loss and asking for the deferral of loans. The bank’s exposure to oil & gas production sector and oil field services sector is less than 1% and ~1%, respectively. Further, the bank is reducing its concentration in the real estate sector and focusing on Tier 1 borrowers.

• Improved performance on sequential quarter basis: The company reported 4% revenue growth and a lower provision for credit losses. Net Income improved by 2% to CAD 63 million, as 4% revenue growth and a lower provision for credit losses were largely offset by a 12% increase in noninterest expenses. Net Interest Income improved by 3% to CAD 207 million, driven by a five-basis point improvement in net interest margin and 2% loan growth. Non-Interest Income soared by 16% on account of full quarter contribution of the wealth acquisition and higher credit-related fees, partially offset by lower net gains on securities.

Source: Company Presentation 

• Solid loan growth: Total loans, excluding the allowance for credit losses, surpassed CAD 30 billion to reach CAD 30.2 billion at the end of Q4FY20, up 6% from last year and 2% from the prior quarter. Growth was led by a 13% increase in the strategically targeted general commercial portfolio, which reflects ongoing efforts to increase full-service relationships across the bank’s national footprint. General commercial loans represent 32% of the total loan portfolio, compared to 30% a year ago. Commercial mortgages increased 12% primarily due to strong growth in British Columbia (BC) and Alberta.

Source: Company Presentation

• Yielding High with Consistency in Dividend payment: At the last closing, shares of CWB were offering a dividend yield of 4.07%, which is decent given the lower interest rate environment. Further, the company has a track record of consistent dividend payment over the past 20-years. High yield with the consistent track record of dividend payment is likely to bring CWB shares in the investor’s limelight, especially income seeking investors. Moreover, the company has delivered steady growth in dividends since 2011.

Dividend History. Source: Company Presentation

• Risk Associated to Investment: Given the economic uncertainties hovering over the Canadian economy and slowdown in the global economic growth, the group might witness an increase in the Non-performing assets, primarily in the sectors like oil & gas, hospitality, tourism; however, the group's exposure towards these sectors is relatively low. Further, the bank is also exposed to the interest rate risk, and any further policy rate cut by the Bank of Canada would drag the bank's interest margin, which would result in lower revenue, despite volume increase due to the credit offtake. 

Financial Highlights: Q4FY20

Source: Company Filing

• Total revenue grew 7%, which reflected a 54% increase in non-interest income combined with a 3% increase in net interest income. Non-interest income increased primarily due to the contribution of the wealth acquisition and net gains on securities related to the re-balancing of the bank’s cash and securities portfolio in light of market volatility.
• Net interest income increased as the benefit of 6% loan growth was partially offset by a 10 basis point decline in net interest margin, primarily due to a cumulative reduction in the Bank of Canada policy interest rate of 150 basis points in March 2020.
• Common shareholders’ net income of CAD 63 million and diluted earnings per common share of CAD 0.73 declined 6% and 5%, respectively. Adjusted common shareholders’ net income of CAD 65 million and adjusted earnings per common share of CAD 0.75 each declined 4%. Pre-tax, pre-provision income of CAD 116 million was up 2%.
• The fourth quarter return on common shareholders’ equity (ROE) of 9.2% was 140 basis points below last year and adjusted ROE of 9.5%, which removes the impact of one-time acquisition and integration costs as well as amortization of acquisition-related intangible assets, was 120 basis points lower due to higher average common shareholders’ equity combined with lower earnings. However, Q4FY20 ROE and adjusted ROE were consistent with last quarter.
• Full year ROE of 9.3% was 160 basis points lower than last year and adjusted ROE of 9.5% declined 180 basis points.
• The fourth quarter return on assets (ROA) of 0.75% was 11 basis points below last year, due to higher average assets and lower earnings, and consistent with last quarter. The full year ROA of 0.76% declined 12 basis points.
• The fourth quarter efficiency ratio of 50.9% increase compared to 48.2% last year and 47.0% last quarter. Excluding the impact of the wealth acquisition, the fourth quarter efficiency ratio was 49.2% compared to 45.7% last quarter with the increase from prior periods attributable to revenue growth more than offset by higher non-interest expenses.
• Total loans, excluding the allowance for credit losses, surpassed CAD 30 billion to reach CAD 30.2 billion, up 6% from last year and 2% from the prior quarter.
• Total deposits of CAD 27.3 billion were up 8% from last year and up 3% compared to last quarter, driven by robust branch-raised deposit growth of 20%.

Top-10 Shareholders

The top 10 shareholders have been highlighted in the table, which together forms around 27.72% of the total shareholding. QV Investors Inc. and Dimensional Fund Advisors, L.P. holds the maximum interests in the company at 5.34% and 3.60%, respectively. The institutional ownership in CWB stood at 41.34%, and ownership of the strategic entities stood at 2.7%, respectively.

Source: Refinitiv (Thomson Reuters)

Valuation Methodology (Illustrative): Price to Book Value based Valuation Metrics

 *Note: All forecasted figures have been taken from the Thomson Reuters.

Peer Comparison

Source: Refinitiv (Thomson Reuters)

Stock Recommendation: The bank delivered solid results in a very challenging environment as they continue to make significant progress to become the best full-service bank for business owners in Canada. Strong financial position provided stability through this period of unprecedented economic volatility.

Further, the bank recorded strong branch-raised deposit growth and proactive deposit pricing measures provided a five-basis point sequential increase in our fourth quarter net interest margin. Also, the bank has diversified funding mix and strong, consistent growth in branch-raised deposits. Reliance on broker deposit funding continues to decline. Moreover, the bank has strong capital ratios with buffers above regulatory minimums.

Also, the bank Continued to advance their digital capabilities, launching end-to-end digital onboarding for Motive Financial clients that allows accounts to be opened virtually with immediate ability to transaction.

Therefore, based on the above rationale and valuation done using the above methodology, we have given a "buy" recommendation at the closing price of CAD 28.45 on January 29^, 2021.

Disclaimer

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