When talking about investing in banks in Canada, the Big Five banks come to mind. However, two smaller, regional banks could offer higher total returns, namely Canadian Western Bank (TSX: CWB) and Ā Laurentian Bank of Canada (TSX: LB). Which should investors buy today? First, let’s compare the two.
High-level comparison
| Ticker | Price | Yield | P/E | Market Cap |
| CWB | $29 | 2.9% | 10.6 | 2.3 billion |
| LB | $48 | 4.5% | 9 | 1.4 billion |
Laurentian Bank is more attractive to income investors with its high yield of 4.5%. At first glance it also seems to be cheaper with a lower price-to-earnings ratio (P/E).
On the other hand, comparing the regional banks with their own historical multiples tells a different story. In the past 10 years, Laurentian Bank normally traded at a P/E of 11.2, while Canadian Western Bank normally traded at a P/E of 15.2 in the same period.
This implies that Laurentian Bank is trading at about 20% cheaper compared with its historical norm, while Canadian Western Bank is trading at an even deeper discount of 30%.
* Total return comparison
| Company | 1-Year | 3-Year | 5-Year | 10-Year | 15-Year |
| CWB | -19.2% | 5.7% | 7.1% | 9.8% | 14.4% |
| LB | 7.7% | 9.7% | 5.8% | 8.9% | 8.4% |
| S&P/TSX 60 | 8.3% | 14% | 7.3% | 8% | 5.4% |
* Total return with dividends reinvested.
The recent performance of Canadian Western Bank has been disappointing, and Laurentian Bank has been the better choice for consistent single-digit returns. However, when looking at the 15-year period, Canadian Western Bank had been the star performer.
Because of the oil price slump, Canadian Western Bank has been hit hard, just like in the financial crisis. It is exactly these opportunities that allow investors to buy a great business such as Canadian Western at a huge discount, leading to exceptional returns.
Dividend-growth comparison
Canadian Western Bank has increased dividends on an annual basis for 23 years in a row, while Laurentian Bank has hiked dividends for seven consecutive years.
Hereās a comparison of the regional banksā dividend-growth rates in the various periods.
| Bank | 1-Year | 3-Year | 5-Year | 10-Year |
| CWB | 11.1% | 12.6% | 12.7% | 17.6% |
| LB | 4% | 8.3% | 8.7% | 5.9% |
I expect Canadian Western Bankās dividend growth to slow down this year as the bank forecasts its earnings-per-share (EPS) growth to be between 5-8%, half less than last year’s growth.
If you expect oil price to rebound, then thereās no reason Canadian Western Bank shouldnāt trade at a P/E of 15 again at roughly $40 based on todayās EPS.
Which regional bank should investors buy?
Investors looking for higher income would likely gravitate towards Laurentian Bank for its juicy 4.5% yield.
For the total return investor, both regional banks offer excellent value at their current prices. However, I believe Canadian Western Bank is priced at a deeper discount than Laurentian Bank.
If these two banks were to trade at their historical multiples again from capital gains alone, Canadian Western Bank offers over 38% return reaching over $40, while Laurentian Bank offers over 27% return reaching over $61. When you add in the dividends, thatās a total return of 30% to 40% between the two banks.
