The oil price collapse has hit Canada’s energy patch hard.
Not only are investors still reluctant to invest in oil sands stock, but many non-energy companies operating in Western Canada have seen their popularity wane. Canadian Western Bank (TSX: CWB), which many pundits feared would be sharply impacted by the oil crash, has weathered the storm in good shape.
Despite consistently delivering some credible results, it remains unpopular with investors having lost 20% over the last year. This is regardless of Canadian Western being one of Canada’s top dividend aristocrats having hiked its dividend payment on an annualized basis for the last 27-years straight, giving it a juicy 3.7% yield.
Credible results
Even after oil weakened once again, causing Canadian Western’s shares to tumble it still delivered some solid second quarter 2019 results.
Revenue expanded by 7% year over year to $210 million, while earning per share on a diluted basis shot up by 4% to $0.71. Total assets expanded by 7% year over year to $30 billion, while loans and deposits experienced strong growth expanding by 10% and 8% respectively.
Impressively, that growth occurred in spite of a weaker economy and softer housing market. A key part of Canadian Western’s strategy aimed at mitigating the impact of the oil rout has been to bolster its operating footprint on Canada’s east coast, which sees 30% of its loans now originated in the region.
The bank’s ongoing expansion into specialized financing and wealth management is enhancing its growth prospects and making it less reliant upon the oil dependent economy of Alberta.
It should also be noted that despite being focused on Western Canada, by the end of the second quarter 2019 only 1% of Canadian Western’s loans were to the oil and gas industry.
The bank is also far less dependent on consumer and residential lending than most other Canadian banks, as mortgages and personal loans only make up 20% of its total loan portfolio.
While net impaired loans for the second quarter grew significantly, rising by 45% year over year in value, to see Canadian Western’s net impaired loan ratio gain 0.13% to be 0.52% at the end of the period, this ratio is still well within acceptable levels.
The bank remains focused on renegotiating impaired loans and ensuring that there are sufficient provisions in place for potential credit losses.
That along with strong credit underwriting and risk management processes is responsible for the high quality of Canadian Western’s loan portfolio.
It also remains well capitalized, finishing the second quarter with a common equity tier one capital ratio of 9.1% which is 2.1% greater than the regulatory minimum.
Foolish takeaway
Canadian Western, regardless of the headwinds it is facing, is now too cheap to ignore. The bank is trading at a very modest 2% premium to its book value per share and a forward price-to-earnings ratio of 8.5, emphasizing just how attractively it is valued, making now the time to buy.
In addition, Canadian Western’s long history of regular dividend hikes and juicy 3.7% yield will reward patient investors as they wait for its stock to appreciate.
