Canadian Western Bank: Growth Stock Play (TSX:CWB:CA)

Canadian Western Bank (OTCPK:CBWBF) (TSX:CWB:CA) also known as CWB is a Canadian banking institution based out of Western Canada. As of Dec 31, 2023, its total asset size is approximately $43 billion. This makes CWB the 8th largest bank in Canada by total asset size. A move up from 10th place several years ago.

Canadian Western Bank is a smaller player in Canada’s banking industry. Its smaller size allows it to be more nimble and adaptable. As it expands across the country I see growth in its bottom line and an upward trend for its stock price.

Canadian Western Bank’s Target Markets are its Business Clients

Canada’s banking industry is largely dominated by the following six banks, also known as The Big 6:

• TD Bank
• CIBC
• Royal Bank
• Bank of Montreal
• Scotia Bank
• National Bank

Each of these banks offers a wide range of products and services ranging from banking solutions, insurance, loans, and investment products to wealth management. This wide spectrum of products and services allows The Big 6 to capture a wide net of various customers and client groups.

The downside to having such a wide range of products and services means it makes it difficult to cater these individual products to individual clients. This allows CWB to operate its own niche in servicing only business clients and their families. Small and medium sized businesses generate over 50% of the private sector’s GDP annually. With its expansion eastward, its plans so far has been reaping dividends. Its Ontario loans have grown by 11% year over year in the past 5 years. It now accounts for a quarter of its total loan portfolio size. The general commercial loan type has also grown significantly in the past 5 years from 28% to its current 37%:

Source: 2023 Canadian Western Bank Annual Report

Canadian Western Bank and its Expansion into Toronto’s Financial District

In January 2024, CWB opened new regional wealth and banking hub in downtown Toronto. The move was meant to be closer to its business clients and to be located in Canada’s financial capital. Another way of looking at it is it’s also planting its flag to show it plans to take on The Big 6 banks.

CWB’s strategy is to grow organically rather than through acquisitions so being in the downtown Toronto core gives it exposure to the businesses located there.

This is not really a game changer but it does speak to CWB’s goal of becoming a national bank.

Canadian Western Bank and Its Resiliency

In the past 7 years, CWB has shown profitability growth and steady dividend growth. In applying the Piotroski F-Score to look at CWB’s financials, where a score of 1 implies weak financial strength and a score of 9 shows a strong financial company, CWB consistently operates on a range of 5 – 6:

Source: CWB Annual Report from 2017 to 2023

Its F-Score fell in 2022 because it had increased its leverage slightly and its current ratio fell from the year before. But overall, its balance sheet is still strong. Its 2023 gross margins and net income grew as a result of more businesses in 2023.

Its dividends have also grown consistently in the past 6 years even during the pandemic. This shows management’s confidence in its business. Its dividend payout ratio is also relatively low as it reinvests more than 50% of its profit back into the business:

Source: CWB Annual Reports from 2017 to 2023

In the past year interest rates in Canada have remained high. For companies, this means the cost of doing business has gone up. For CWB, this could be an issue as one of its main business is to lend money. However in looking at the credit quality of CWB’s borrowers, its impaired loans and percentage of writes remains low at less than 0.2% annually:

Source: 2023 Canadian Western Bank Annual Report

To put it all together, CWB financial statements remain strong even during the pandemic. In a period of elevated interest rates CWB clients are not in financial distress. Also, its earnings per share have been growing year over year since 2017. This shows CWB’s ability to grow regardless of how the economy is moving.

Canadian Western Bank compared to its Competition

In comparing CWB to The Big 6, CWB’s stock is priced cheaper than the competition. In looking at the PE ratio CWB is lower than the others:

Source: Google Finance, Canadian Western Bank and The Big 6 Annual Report

Also, CWB dividend payout ratio is lower than The Big 6. In my opinion, a lower dividend payout ratio means a lot of its operating cash is kept in the business and this is money it can spend for future growth or to be used as contingency.

Conclusion

It’s not often we see a Canadian bank looking to grow its business inside the country. While The Big 6 banks to various degrees have expanded outside Canada, CWB is taking a different path.

CWB’s growth plans is working and investors can see it just by looking at its financial statements and its EPS. Its bottom line has been consistently growing.

The one risk factor for CWB is because it operates only in Canada, its fortunes are also influenced by how the Canadian economy performs. Recently, the federal government has released a new capital gains tax and the feedback is it will be detrimental to future business investments. Indirectly, this could dampen the Canadian business community investment appetite and take out fewer new loans.

Regardless, I do like CWB’s business fundamentals and its strategy, I’m bullish on CWB.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.