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Is Canadian Western Bank Super Cheap?

From a 2014 high of about $40, Canadian Western Bank (TSX:CWB) has fallen 36% to $25.6 per share. Thanks to the drop in price the dividend-growth stock now yields 3.4%, which is historically high for the bank; it has yielded 2.5% at most in the past few years.

The bank has combined assets worth $22.3 billion, it administers $9.4 billion of assets, and it manages $1.9 billion of assets.

Why the fall in price?

Canadian Western Bank is the biggest publicly traded Canadian bank based in western Canada. The fall in the oil price has brought down the bank’s share price because 42% of its loans are from Alberta and 7% are from Saskatchewan.

How has oil affected the bank?

In the third quarter of 2015, Canadian Western Bank sold Canadian Direct Insurance, a property and casualty insurance subsidiary, and Valiant Trust Company, a stock-transfer business subsidiary.

Those sales equated to gains of $107.6 million and contributed to $1.33 of earnings per share (EPS). Ignoring this one time gain, third-quarter earnings were only 3% lower than 2014 in the same period.

Loan growth continued to be strong. From the start of this year to the end of July, loan growth was 9%.

In the past 15 years, the worst the bank has done was losing 10% of EPS in 2002 when it traded at a multiple of about 11. Additionally, in 2003 it posted 24% EPS growth to compensate for the previous year’s loss.

Valuation

In the past eight years or so, including the current price dip and the dip during the financial crisis, the bank’s normal multiple was around 13. That’s a conservative multiple for the bank. Today Canadian Western Bank trades at a multiple under 10. If shares were around a multiple of 13, they would be worth about $34.5 per share, implying that the bank is discounted by at least 25%.

Strong dividend-growth history

Canadian Western Bank has a strong dividend history. It has increased dividends for 23 years in a row, taking the third place of the top Canadian dividend-growth companies. Over the past decade the bank increased dividends on average at a rate of over 11%. It targets a payout ratio of 25-30%, and in fiscal year 2014, its payout ratio was roughly 29%. So, going forward, the bank will likely slow down its dividend-growth rate.

Credit losses

Historically, Canadian Western Bank has demonstrated low credit losses relative to the Big Six Canadian banks. Even from the start of this year to the end of July, Canadian Western Bank still posted 20% less credit losses compared with Bank of Montreal, which posted the least credit losses among the big banks. To put it into perspective, Canadian Western Bank’s credit loss was only 16 basis points in that period.

In conclusion

Yes, the bank has concentration risk in the resource provinces. However, it seems that the effects of the oil price hasn’t been that severe, yet the bank’s share price has already fallen over 30%.

The fear is that oil prices will remain low for an extended period of time. The bank loans in the resource provinces are seen as higher risk. That’s why Canadian Western Bank shares are down.

Canadian Western Bank is cheap compared with its history and it could be a lucrative investment. However, the share price will likely stay down until the oil price recovers. If you can live with a 3.4% yield and wait for this value investment to recover, you can buy some shares for your diversified portfolio.

Here are some other banks for your portfolio.

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Fool contributor Kay Ng owns shares of CDN WESTERN BANK.

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