The Canadian banks are in a rough patch right now.
Canadian interest rates are stagnating, and they’re probably going to be cut at some point over the next year thanks to the global slowdown in the economy. While the unfavourable macro headwinds have been a fairly recent drag for the banks, it’s just another bump in the road for Canadian Western Bank (TSX: CWB), the big regional bank that primarily conducts business on the west coast, as you may have guessed.
The Edmonton-based bank has been under a considerable amount of pressure for well over a year now with shares down around 29% at the time of writing. In the past, I slammed Canadian Western Bank because of its higher-risk profile and the meagre dividend that I thought wasn’t a suitable enough extra reward for the added risk that investors would have taken on with the name.
After shares have pulled back significantly though, I’ve changed my tune, touting the stock as a bargain bet with big upside potential for those who were bullish in a rebounding of the Albertan economy.
While Canadian Western Bank conducts its business in British Columbia, which has also been a drag thanks to the drastic slowdown in the housing market, it’s ultimately the province of Alberta that will dictate the trajectory of Canadian Western Bank stock.
Since the 2014 oil plunge, Canadian Western Bank (and most firms exposed to Alberta) has been treading water, and while the outlook continues to look bleak for Alberta and the ailing oil patch, I believe the risk/reward trade-off is now more attractive for long-term-focused contrarians who are looking to get the most out of their invested buck.
Sure, the company has some baggage, and its Albertan loan book isn’t the most attractive in the world, but things could definitely be worse.
On the bright side, the recent rebounding in WCS prices and Warren Buffett’s big bet on the oil sands show hope that things could get better from here. Pipelines will be a significant source of relief for the Albertan economy, and as the WCS-to-WTI gap fades in conjunction with WTI’s continued rally, the “buy Alberta” story may be one that pays off major dividends to the ones who had the patience to stick around.
Foolish takeaway
Today, Canadian Western Bank trades at a mere 10.16 times trailing earnings with a 3.6% dividend yield. The yield isn’t too impressive relative to its bigger brothers, but like its bigger brothers, it’s a dividend-growth king that’ll keep pushing its dividend forward in spite of any environmental pressures.
But the main attraction isn’t Canadian Western Bank’s yield (it’s among the lowest in the space); it’s the upside potential in a rebounding of the Albertan economy. Given the broader macro and regional worries that are already priced into Canadian Western Bank, I’d say the stock has the most room of its peers as the bar has been set so low that it won’t take much for the bank to pole vault over expectations.
At this juncture, investors are just looking for a sustained change in trend.
Stay hungry. Stay Foolish.
