TSX : C$36.99
BUY Target: C$42.00
COMPANY DESCRIPTION: Canadian Western Bank is a Schedule I chartered bank that operates in Western Canada. The Bank specializes in mid-market commercial lending and offers a full complement of personal banking services. Through the Canadian Western Bank Group, the firm offers a diversified range of financial services across Canada. CWB operates 41 bank branches and has more than $19 billion in assets.
All amounts in C$ unless otherwise noted
SOLID LOAN GROWTH
Investment recommendation We are maintaining our BUY rating and slightly increasing our target price to C$42.00 (from C$41.00). We have increased CWB’s valuation target premium to 17% (from 14%), in-line with its historical average (see Fig. 11) to reflect relatively higher EPS growth expectations of 14%/16% vs. the Big-6 banks average at 5%/7% (based on consensus estimates). Our annual EPS estimates remain relatively the same (see Today’s Changes box). The partial replacement of high cost Series 3 Preferred with NVCC (4.4% yield) is offset by our lower NIM forecasts of 2.75% (from 2.87%) for F2015. CWB has a favourable positioning towards our key bank themes, specifically better operating leverage (+1%/1% in F14/15E) and large exposure to higher growth commercial loans (~75%), contributing to solid loan growth (+13% YoY).
Investment highlights Q1/F14 results solid. CWB reported adjusted cash EPS of $0.67 (up 3.1% QoQ and 15.5% YoY), above our (and consensus) forecast of $0.65. While NII of $125.3 million (up 0.4% QoQ) was lower than expected due to NIM, non-NII of $28.5 million (up 9.0% QoQ) was higher than expected, PCLs were lower than expected, and NIE was in-line. CWB generated positive leverage of 1.7% in Q1/F14. Total loans grew 3.7% QoQ.
Strong credit trends. The PCL ratio was flat QoQ at 19 bps and below our 21 bps forecast. The result was at the low end of management’s F2014 guidance for 18-23 bps. GILs declined 16.0% QoQ to $53.9 million (33 bps of total loans).
Valuation F2015E bank group P/E multiple of 11.5x that CG uses in valuing the Canadian banks.