Canadian Western Bank is updated and rated (higher) Buy at $35.50.
It was surprising and disappointing to see CWB drop $2.00 after releasing a strong earnings report on Thursday morning. The earnings growth of about 9% apparently fell short of analyst expectations of about 12%.
The additional drop of 61 cents on Friday was more understandable, and could have been larger, given the bad news about the TransMountain pipeline and given that the NAFTA talks did not appear to be going well.
Certainly CWB could decline if a NAFTA deal is not soon reached or oil prices decline or it reports unexpected loan losses. But overall, it appears set to continue to grow earnings. And, its valuation in terms of the P/E ratio and price to book ratio is lower than its historic average. Its price to book ratio is 1.38. A more normal level is closer to 1.75 to 2.0. But it has gone done down to around 1.0 or slightly below at times.
One could ponder what is a fair multiple of book to pay for a company that is earning around 12% on book equity in a world where the ten year Canadian government bond yield is 2.3%? At its current price, CWB pays a cash yield of 2.9%. Based on historic results, CWB’s book value per share could easily double in ten years. There will certainly be investments that do better than CWB in the next ten years. One of those will almost certainly not be a ten year government bond purchased today at a yield of 2.3%.
Canadian Western Bank now does about one third of its lending in Alberta, one third in B.C. and one third in the rest of Canada (largely Ontario). The Ontario lending is not done through bank branches.