Canadian Western Bank (TSX:CWB) and Silicon Valley Bank, which traded as SVB Financial (NASDAQ:SIVB), are regional banks in their respective countries. Silicon Valley Bank just failed. Will Canadian Western Bank be next?
Although not quite in a bear market yet, CWB stock is down 12% from its recent high, underperforming the big Canadian bank sector (using BMO Equal Weight Banks Index ETF as a proxy), which is down about 7%.
Why Silicon Valley Bank failed
Before we explore the answer to that question, here’s a quick background story of the Silicon Valley Bank collapse. Silicon Valley Bank, which positioned itself to serve clients in fast-growing tech and life sciences startups, saw its deposits grow 2.8 times to $173.1 billion from 2019 to 2022!
Naturally, it parked a big chunk of money in risk-free investments like U.S. Treasuries. Unfortunately, the continuous rising interest rates since 2022 weighed on bond prices, including U.S. Treasury bonds. This eventually led to Silicon Valley Bank taking a US$1.8 billion loss on these “risk-free” investments, as its start-up clients withdrew their deposits, either because they were strapped for cash or worried about SVB’s stability in a rising interest rate environment. In any case, it was a classic run on a bank.
SVB Financial attempted to raise US$1.75 billion from common stock and mandatory convertible preferred stock last Wednesday (March 8) to raise cash. Unfortunately, it was too late. By Friday (March 10), the U.S. regulator, the Federal Deposit Insurance Corporation (FDIC), stepped in to shut down Silicon Valley Bank to protect depositors. Bloomberg noted that the FDIC kicked off an auction process late Saturday for Silicon Valley Bank, with final bids due by Sunday (March 12) afternoon.
Will Canadian Western Bank be next?
From the volatility of its long-term stock price, investors can guess that Canadian Western Bank stock could be higher risk than the big Canadian banks. However, its earnings haven’t been nearly as volatile.
In the past 20 years, the worst year was fiscal 2016, when CWB’s diluted earnings per share (EPS) fell 19%. Only five other years saw a decline of 3-9%.
It may come as a surprise to some investors that CWB is the top Canadian bank stock with the longest dividend-growth streak of 31 years on the TSX. At about $25 per share at writing, the bank stock offers a dividend yield of almost 5%.
What about the bank’s loan portfolio? Its total loan portfolio total approximately $36.4 billion. It’s divided across general commercial loans (35% of total loans), commercial mortgages (20%), personal loans and mortgages (20%), equipment financing and leasing (15%), real estate project loans (9%), and oil and gas production loans (0.8%).
In the last reported quarter, Canadian Western Bank saw loan growth across its loan portfolio, with the highest growth of 18% and 14%, respectively, year over year, from the provinces of Quebec and Ontario. Other than Ontario, which makes up 25% of its loan portfolio, the bank also saw solid growth of 8% and 7%, respectively, at British Columbia and Alberta, which make up 32% and 31% of its loan portfolio.
The bank’s gross impaired loans as a percentage of gross loans rose in the fiscal first quarter but were still below the pandemic levels. Moreover, CWB ended the quarter with a common equity tier-one ratio of 9.1%, which is above the regulatory minimum of 7%.
Because of the diversity of its loans from different provinces that focus on different industries, CWB is unlikely to follow Silicon Valley Bank’s footsteps.
