August 26, 2019

On Monday, the S&P 500 was up 1.1% and Toronto was up 0.4%. This came after President Trump said that China was ready to negotiate a trade deal. There is probably little reason to believe it but the market of course wants to believe it, so they do, at least to some extent.

Canadian Western Bank was up 2.3% to $30.94. It looks cheap on the basis of price to book value and the P/E ratio. They report Q3 earnings on Thursday. Earnings should be solid unless they have experienced unexpected loan losses. Net Interest Margin may have declined somewhat due to lower mortgage rates (and possibly lower rates on other loans) and the market will be trying to forecast if that margin will fall further in Q4 due to lower loan interest rates combined with deposit rates that have not yet been adjusted down for the possible Bank of Canada rate cut. Analysts will also be looking carefully at any increase in impaired loans or loan loss provisions. So far, CWB management has expressed confidence that they do not expect to see materially higher actual loan losses even if impaired loans rise (they tend to get good recoveries as their loans are mostly secured). Steve Eisman has pointed out that Alberta Treasury Branches has experienced higher loan losses and provisions and he thinks some of the same will apply to other banks. Overall, with low natural gas prices and slower economy in western Canada and with the potential for lower interest rates and higher loan losses, we should probably not expect CWB’s Q3 report to be good enough to push CWB’s price up much (and it could fall) despite its attractive valuation. I would like to see CWB give an update on its move to the more favorable method of calculating its risk-weighted assets. That move in 2020 is expected to boost profits, although they have not yet said by how much.

Ultimately CWB will almost certainly continue to grow over the years and the stock price will follow although not in a smooth fashion.