Our report on Canadian Western Bank is updated rated Speculative Buy at $29.00 (it closed today at $29.09)
There are many pluses and minuses to consider about buying shares in CWB at this time:
The biggest minus is that it is already expecting a continued increase in loan losses and probably write-offs in the next year and things could be worse than expected. The bank has been careful to offer payment deferrals to businesses affected by lockdowns rather than attempting to enforce loan payments which could push some into insolvency. And the federal government has done a lot to support businesses and the provinces have done things as well. Everyone wants businesses to get through the lockdowns. CWB has a strong history of weathering recessions without bad loans getting too high. Still, the COVID situation is unique and it is possible that the ultimate bad loans will be worse than expected.
Another minus is that CWB has never earned the high returns on equity that the biggest Canadian banks have. Accordingly, it trades at a cheaper multiple to earnings and book value. If that will be the case for many years into the future then it might be better to own the bigger more profitable banks even though they trade at higher “multiples”.
Another minus is they are projecting no earnings growth this next year (due to bad loans) even though loans and deposits will grow.
On the plus side… CWB is trading at just 91% of book value and in the past has been well over 200% at times. If the multiple goes back up we get a double just from that.
And CWB will almost certainly grow over time. As it grows, profits will ultimately grow as will the share price eventually.
Banking is generally a good business. Here you have a chance to buy a bank for 91 cents on the dollar of its book value. To borrow a concept from Warren Buffett: If you started your own bank it would cost you a dollar on the dollar (and then take years to get up to speed).
Overall, CWB will not likely turn out to be a really fantastic investment but it will probably be a reasonably good investment.
A reasonable strategy might be to hold or buy a sort of half position and be prepared to add to that if the price happens to go back below about $25 due to the loan loss situation next year.