Canadian Western Bank (TSX: CWB) was formed through a merger of the Bank of Alberta and Western & Pacific Bank of Canada back in 1988, and it’s still seen as a regional bank despite its national expansion — with significant consequences on CWB stock.
CWB stock sometimes falls alongside U.S. regional bank troubles and during economic concerns in Western Canada. Conversely, the $2.5 billion Canadian bank stock rises when investors anticipate a strong Western Canadian economy. These external factors create volatility in CWB stock that management has no control over.
However, Canadian Western Bank is actively working to reduce this volatility, and the results are promising. Tangible changes in the business model could lead to a smoother performance for CWB stock. Let’s explore these developments and why they matter to investors.
Canadian Western Bank has diversified its business
Although investing markets still view CWB stock as a regional bank with business concentrated in the volatile Western Canada economies of Alberta and British Columbia, the bank has made significant strategic efforts to diversify and spread its loan portfolio across Canadian provinces over the past five years since rebranding in 2019.
Canadian Western Bank grew its loan book in Ontario by 5% year over year during the first quarter of Fiscal 2024 to $9.4 billion, or 25% of its total portfolio. Loans to clients in Ontario have averaged a compound annual growth rate of 10% per annum over the past five years. Quebec loans are following behind with a 9% year-over-year growth during the past quarter to 4% of total loans.
Although British Columbia and Alberta still constitute the majority share of the bank’s loan book at 62%, Ontario and Quebec disbursements comprise a significant 29% of Canadian Western Bank’s loan book now.
The bank recently opened a new Toronto financial district banking centre in Ontario last quarter. Its efforts to diversify its business across the entire country are working full throttle and bearing fruit.
It’s only a matter of time before the market stops labelling CWB as a regional bank stock. It’s only a matter of time before the bank stock escapes the punishment unjustly meted out on its share price whenever something bad happens with a small U.S. regional bank.
CWB stock tapping into low-cost funding sources
The bank diversifying its funding model. It’s moving away from expensive broker term deposits and capital market deposits as primary sources of funding. Its increasing reliance on cheap demand deposits, notice deposits, and term deposits from its depositor base could lower funding costs, improve its net-interest margins, and grow its earnings per share.
Broker deposits, which comprised 25% of Canadian Western Bank’s funding sources during the past quarter, used to contribute 35% of its funding during the same period in 2019. Likewise, capital market deposits’ share has declined from 10% in 2019 to 8% recently. Both funding sources attract high interest costs, whereas demand deposits and notice deposits usually receive very low interest payments.
A stronger balance sheet
The bank’s common equity tier-one capital (CET1), a measure of its ability to take on more lending business, grow its loan book, and guarantee more financial transactions, has grown from 9.7% during the fourth quarter of fiscal year 2023 to 10% during the first quarter of the current financial year.
Canadian Western Bank’s CET1 capitalization rate is far above a regulatory minimum of 7%.
Although the growth in equity hurts CWB stock’s return on equity (ROE) in the near term (because there is too much equity base), the bank is well prepared to take on more business once current risks come out of the Canadian economy when interest rates soften.
ROE could improve from recent levels of 10.1% recognized during the first quarter.
Considering that a growth in ROE is usually accompanied by share price growth, CWB stock could rise again following a 14% year-to-date drop.
Meanwhile, new investors could scoop the dividend stock’s 5.1% dividend yield for passive income.
