Canadian Western Bank (TSX: CWB) is a full-service financial institution in Canada, which provides nation-wide full-service business and personal banking, specialized financing, comprehensive wealth management offerings, and trust services. 

Key Investment Rationale:

• Higher Dividend distribution: Despite the ongoing economic turbulence, the company reported slightly higher dividend distribution of CAD 31.6 million in Q1FY22, as compared to CAD 30.6 million in pcp. This is impressive as most of the companies are lowering their dividend payment in order to retain liquidity. Moreover, the stock of CWB carries a dividend yield of ~3.845% on an annualised basis, which looks impressive considering the present interest rate scenario.

• Consistent Growth in Revenue: The company reported a consistent growth in its revenue, supported by stable growth in the net interest income and non-interest income. This improvement was supported by a favorable shift in the funding mix from strong branch-raised deposit growth.

                Source: Company Presentation 

• Steady surge in Loan book: Over the years, the company reported a constant growth in its loan book, supported by strong new lending volumes with high-quality borrowers and underlying assets with balanced risk profile. Moreover, the company has strong client relationships which has also contributed to the loan growth. Notably, in Q1FY22, the company’s general commercial loans and commercial mortgages loan grew by double-digit over previous corresponding period, which is encouraging.

• Positive Outlook: The Corporation reported a strong loan growth over the years by focusing on full-service relationships with a strategically shifting industry mix. The group is focusing on further geographic diversification, with 10% annual growth in Ontario region. Also, opening new banking centres in Markham in 2022 and downtown Toronto in 2023, which offers ample growth potential. Additionally, the company is continuing its progress toward the launch of the digital banking platforms for personal, small business and commercial clients, which looks promising as it would offer several cross-selling opportunities for the company. In FY22, Loan book and Branch-raised deposits are expected to grow at double-digit from FY21. Diluted earnings per common share growth are expected to remain in between the Low to mid-single digit.

Source: Company Presentation

• Growth in Deposit amidst turbulent times: The company posted its total deposits at CAD 30,302.6 million, which is 6% higher than CAD 28,635.3 million in pcp. The surge was primarily supported by higher traction from the branch-raised segment, which grew 12% over the previous corresponding period, which reflects the franchise building strategy to expand our full-service client relationships. Notably, the branch-raised deposits currently represent 65% of total deposits, up from 61% last year.

Source: Company Report

• Prudent Lending Model: The company has a successful track record of consistent lowering its provision for credit losses, which reflects secured and prudent lending operations. A declining provision for credit losses illustrates a secured and stable loan book, which remains a key concern for the financial companies during economic cycles. Notably, provision for credit losses on total loans stood at 0.09% in FY21, which is the lowest in the last five years.

Source: Company Presentation

Risks associated with the Investment:

The company’s performance might be hindered due to a slow economic activity, which would lead to lower loan disbursement and, subsequently, lower interest income. Moreover, rising provisions for credit losses due to sluggish business activity would further dampen the scenario. 

Q1FY22 Financial Highlghts:

Q1FY22 Income Statement Highlights (Source: Company Report)

• Improved top-line: CWB announced its Q1FY22 result, wherein the company posted its total revenue of CAD 265.9 million, which is higher than CAD 245.0 million in pcp. This was supported by both increase in interest and non-interest income.

• Reported Higher income before taxes: The quarter witnessed a lower provision for credit losses amounting CAD 9.0 million as compared to CAD 13.5 million in pcp. Total non-interest expense stood lower at CAD 131.4 million, as compared to CAD 7 million in pcp, due to higher salaries & employee benefit expenses along with a higher other expenses. Due to the lower provision for credit losses as mentioned above, the company reported a net income before income taxes of CAD 125.4 million v/s CAD 114.8 million in pcp.

• Higher Bottom-line: The company’s net income stood at CAD 93.7 million, which grew 10% on y-o-y basis of CAD 84.9 million in pcp. The surge was primarily due to a higher income before income taxes, partially offset by a rise in income tax expenses.

Top-10 Shareholders:  Top ten shareholders of the company together hold approximately 22.60% stake, QV Investors Inc., and Dimensional Fund Advisors, L.P.are the major shareholders in the company with an outstanding position of 3.77% and 3.47%, respectively.

Source: REFINITIV, Analysis by Kalkine Group

Valuation Methodology Illustrative: Price to Book based

Analysis By Kalkine Group 

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks. 

Stock Recommendation:

Despite the sluggish economic scenario, the company reported an impressive loan growth in Q1FY22, which is encouraging and indicates strong client relationships. The company marked improvement across most of its operating metrics, which is encouraging considering the current economic scenario. Moreover, in order to attain improve its operating performance, the group would expand the wealth management segment with increased CWB referral-based client acquisition.

We have valued the stock using the Price to Book based relative valuation method and have arrived at a double-digit upside (in percentage terms). For the said purposes, we have considered peers like Laurentian Bank of Canada, Canadian Imperial Bank of Commerce etc. Considering the aforesaid facts, we recommend a ‘Buy’ rating on the stock of CWB at the last closing price of CAD 31.21 on May 09, 2022. Markets are trading in a highly volatile zone currently due to certain macro-economic issues and geopolitical tensions prevailing. Therefore, it is prudent to follow a cautious approach while investing.

One-Year Technical Price Chart (as on May 09, 2022). Analysis by Kalkine Group

Note: The reference data in this report has been partly sourced from REFINITIV

*Recommendation is valid on May 10, 2022, price as well. 

Technical Analysis Summary

Disclaimer

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