Canadian Western- A Small Bank Buy At Book Value

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Canadian Western Bank (Toronto: CWB) (OTC: CBWBF), unlike the large Canadian banks, is virtually a pure deposit and lending operation.

Fully 88% of its revenues are from the net interest margin on lending and a further 4% is credit-related fees, for a total of 92% from lending. CWB primarily lends to commercial customers as opposed to individuals. The remaining revenue is from wealth management and trust operations.

Alberta and B.C. each account for about 32% of its loans and Ontario 24%. Saskatchewan and Manitoba together account for 8%, and the other provinces account for the remaining 4%.

The stock was hit hard by the pandemic last spring and ended 2020 down 10% to $28.82. But this year to date it has rallied 13%. Looking at the longer term, the stock remains down 22% from highs of about $42 reached back in 2014.

That’s despite the fact that earnings per share have grown 12% and book value per share is up 67% since the end of 2014. In 2014, CWB was trading at considerably higher multiples of earnings and book value.

As of its latest quarter, CWB appears to have come through the worst of the pandemic in very good shape and has resumed earnings growth as loan loss provisions have returned to normal levels.

In the first quarter of fiscal 2021, total loans grew 6% year-over-year, including 14% growth in Ontario. And its lower-cost, branch-raised deposits were up an impressive 20%.

After three quarters of earnings declines caused mostly by higher pandemic-related loan loss provisions, CWB’s earnings per share were up 10% year-over-year in its latest quarter. Revenues per share had continued to grow at an annual rate of 5% for most of 2020 but accelerated to 12% in the latest quarter.

On June 1, 2020, CWB closed the acquisition of iA Investment Counsel Inc., which operates under the brand names T.E. Wealth and Leon Frazer. This substantially increased its assets under wealth management from $2.3 billion to $8 billion, with offices in each of the six largest cities in the country.

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