Canadian Western Bank (TSX: CWB) boasts an impressive 112 consecutive profitable quarters, but like much of the oil-reliant Alberta economy, the Edmonton-based financial services company is feeling the effects of the bust. Take what happened earlier this year. A month before CWB released its second-quarter results, the bank said it would record $33 million in losses related to its oil and gas book. That’s 11% to 13% of the entire portfolio, which caught even the analysts who watch the company the closest off guard.
The incident shows that, for better or for worse, CWB’s fortunes are tied to the price of oil. The bank’s share price tracks the commodity even more closely. The stock peaked at over $40 in 2014 but dipped to around $20 as oil bottomed out this year. What’s important for investors to know, however, is that the firm has been around since 1984, and it has managed, and even grown, through bust cycles before. Canadian Western Bank is also embarking on a diversification strategy so that it’s less reliant on Alberta’s economy, which shows the company isn’t sitting idle, waiting for oil prices to recover—though a rebound would surely help.
Loans directly related to the energy industry make up 5% of CWB’s total outstanding loans, compared with just 2% for many of its competitors. Chief executive officer Chris Fowler, who has been with the company for 25 years and at the helm since 2013, says he frequently tells his staff to focus on what they can change during difficult conditions. “We can control our choice of business mix. We can control our loan underwriting. We can control our decision on investments,” Fowler says. “But we can’t control the price of oil. We can’t control the interest rate environment. We can, in a very meaningful way, mitigate whatever those changes are.”
Another thing CWB can control is where it does business. Just over 40% of its total loan book remains in Alberta, with another 34% in B.C., but the company is focused on geographic expansion. This spring, it acquired two Ontario-based commercial lenders: Maxium Group of Companies, which has issued loans to 35,000 clients in health care, transportation and real estate; and the Canadian division of GE Capital, which provides financing to the hospitality and restaurant industries. “We’re looking at the same lines of business, we just have the opportunity to capture more clients in what is the largest economy in Canada,” Fowler says of CWB’s ambitions in Ontario.
The bank’s mortgage branch, Optimum Mortgage, is another asset that remains strong, even when oil prices are volatile. “It’s not directly tied to Alberta, and it’s not directly tied to oil,” says Robert Sedran, a CIBC Capital Markets analyst.
Optimum had a total of $1.9 billion in loans in 2015, a 31% jump over the previous year. Much of that growth came in Ontario and in the hot market in B.C.’s lower mainland. However, CWB is being cautious. You’ll find Optimum Mortgage clients in Surrey or Abbotsford—not in the high-priced, high-stakes markets in West Vancouver. “We’re not looking to finance houses over $1 million,” Fowler says. “It’s just not the market we’ve been focused on.” The bank is also vetting its residential project lending in Vancouver carefully, choosing only builders with established track records and requiring high pre-sales before moving ahead.
Canadian Western Bank will also benefit from its newly launched core banking system. The four-year, $71-million upgrade replaced all of the old computer software used for CWB’s day-to-day operations. The new system can adapt to technology much faster than the company’s Big Five competitors, according to Fowler. “It gives us a platform that allows us to have a lot more functionality but also be a lot more nimble,” he says. “We will have the ability to put on products and features that will just ‘bolt on’ to this system. The large banks in Canada still have a 50-year-old banking system. What they have to do is connect everything new to that.”
The final phase of this costly system upgrade collided with low oil prices. However unfortunate the timing, the technology overhaul was a necessary growing pain, says Sohrab Movahedi, a BMO Capital Markets analyst. “Historically, these guys have been able to provide superior growth trajectory,” Movahedi says. “I think they’re going through adolescence, where they are morphing from a smaller bank to a bigger bank.” Canadian Western is now the seventh-largest bank in Canada, based on market capitalization.
Analysts and investors, however, remain focused on CWB’s oil exposure—especially after the sizable writedown in its loan book earlier this year, which marks the bank’s highest ever loan loss, according to Darko Mihelic, an RBC Capital Markets analyst. “We did not come away from the conference call confident that it could not happen again in the oil and gas portfolio,” he wrote in a research note to investors.
The recent fires in Fort McMurray, Alta., and associated production shutdowns—force majeure–type scenarios, as Movahedi calls them—add another layer of uncertainty. “For a bank like CWB, where sentiment has been fairly directly correlated to oil prices, if someone wanted to remain bearish on it, one of the excuses will be that Alberta is actually now going to go into a recession, if it hadn’t already,” Movahedi says. Indeed, the analysts who follow CWB rate the stock as a Hold, a Market Perform or a Sell. No one is expecting CWB to outperform the market at a time of depressed oil prices.
There is no doubt that the short and even medium term will be difficult for Canadian Western Bank. While analysts look favourably on CWB’s efforts to diversify geographically, the company will still be providing loans in a low-interest-rate environment, no matter where it operates. The one thing that would certainly give the stock a boost is a sustained uptick in oil prices. “The challenge we have is, there is no great crystal ball on where the price of oil is going to be,” Fowler said during the company’s most recent earnings call. “It is a big variable. It certainly seems to have a little bit more of legs underneath it than it had earlier in the year, but we maintain a very cautious view, and we will be very diligent in how we manage these accounts.” Without that crystal ball, investors will just have to trust in CWB’s disciplined approach to decision-making and its conservative record of loan growth—and hope for oil to rebound.